A contractor is considering whether to purchase or lease a new machine for his layout site work.

Question:

A contractor is considering whether to purchase or lease a new machine for his layout site work. Purchasing a new machine will cost $12,000 with a salvage value of $1200 at the end of the machine's useful life of 8 years. On the other hand, leasing requires an annual lease payment of $3000. Assuming that the MARR is 15% and on the basis of an internal rate of return analysis, which alternative should the contractor is advised to accept. The cash flows are follows:

Alt A (purchase) Year (n) Alt. B (lease) -$12,000 -$3000 -3000 3 -3000 -3000 -3000 -3000 -3000 +1200 -3000 7,

Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... MARR
Minimum Acceptable Rate of Return (MARR), or hurdle rate is the minimum rate of return on a project a manager or company is willing to accept before starting a project, given its risk and the opportunity cost of forgoing other...