Question

Part Ten (NPV)
Memories, Inc. currently leases its equipment from Quality Materials, Inc. for $2,500 per month. Two
years of their contracted five-year lease term remain. MI may terminate the lease at any time by paying
a penalty of $10,000. They are considering purchasing the equipment from Quality Materials, Inc. to
replace the leased equipment. MI must purchase 10 units of each piece of equipment. Memories, Inc.
can purchase equipment at the following prices:
Equipment
Heater
Injection molder
Sealer
Cardboard cutter
Label installer

Price per unit
$ 2,100
$ 5,450
$ 4,100
$ 2,695
$ 1,000

Required:
A. Using NPV analysis, compare the present value of the least payments with the cost of buying
the equipment. Assume a discount rate of 12 percent (ignore tax.) Which option is preferable?

B. MI has the option of purchasing equipment from another supplier at a total cost of $190,000.
The supplier promises that the new equipment will reduce operating costs by $1,000 per
month over the life of the equipment. Assume a 12 percent discount rate (ignore tax.) Which
option is preferable?

C. Calculate the after-tax NPV for each option in A and B assuming a 30 percent tax rate. If
purchased, all equipment will be depreciated over five years, using straight-line depreciation,
and will have no salvage value. Which of the three options is preferable now? (Lease Purchase
from Quality Materials, Purchase for $190,000)

D. What factors other than cost savings should MI consider in these decisions?in these decisions?

Answer 1

A.
	Option I
Particular	Amount
Total Amount payable per month	2,500
Total remaining Months	24
Total amount	60,000
Penalty	10,000
Total	70,000
Discount Rate	12%
Discounted annuity	1.65
Discounted Cash flow	1,15,500
	Option II
Particular	Amount
Heater	2,100
Injection molder	5,450
Sealer	4,100
Cardboard cutter	2,695
Label installer	1,000
Total	15,345
No of units to be purchased	10
Total Cost	1,53,450
Option I is preferable
B.
Purchase cost	1,90,000
Less: Savings
Monthly Savings	1,000
Total Months	24
Total Amount saved	24,000
Net amount invested	1,66,000
Option I is preferable