In: Finance
NPV of buy option:
NPV of Lease Option
NPV of purchase option is -£611.74 while the NPV the Lease option is -£570.64. Since the NPV of lease option is higher (in negative), the Plc. should lease the computer instead of purchase.
Apart from the higher NPV on leases as above, leasing also the following benefits:
1. Leases doesn't involve lump sum initial investment which helps the Plc. in conserving its bank line of credits.
2. Technological obsolescence can be avoided as the computer can be returned after the fixed term of lease
3. Depending on the lease type, the risk and maintenance of the computer rests with the lessor.
Thus, Plc can go for leasing option.
Workings:
Note:
Since the lease payments are pre-paid, first payment is made immediately (in year 0).