Question

In: Finance

The Old School is trying to decide whether it should purchase or lease a new high...

The Old School is trying to decide whether it should purchase or lease a new high speed photocopier machine. It will cost the school $14,000 to purchase the copier and $750 each year to maintain the machine over the course of its 6 year useful life. At the end of the sixth year, Old School expects to be able to sell the copier for $1,000. A dealer has offered to lease the school the same copier for a payment of $750 at the beginning of the lease plus lease payments of $3,450 per year for four years. Lease payments include all maintenance. The dealer was unable to offer a lease longer than 4 years. Lease payments would be made at the beginning of each year. If Old School's discount rate is 7 percent, which alternative should it chose and why?

Solutions

Expert Solution

Select Purchase option since it has higher NPV (lower costs)

NPV of purchase   -28175.45
NPV of lease -31590.36

Workings

Purchase Lease
Year Initial cost Maintenance Sale Net CF Initial cost Lease payments Net CF
0 -14000 -14000 -750 -3450 -4200
1 -750 -750 -3450 -3450
2 -750 -750 -3450 -3450
3 -750 -750 -750 -3450 -4200
4 -750 -750 -3450 -3450
5 -750 -750 -3450 -3450
6 -14000 -750 1000 -13750 -750 -3450 -4200
7 -750 -750 -3450 -3450
8 -750 -750 -3450 -3450
9 -750 -750 -750 -3450 -4200
10 -750 -750 -3450 -3450
11 -750 -750 -3450 -3450
12 -750 1000 250 0

jeff jeffy answered 1 year ago
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