Exercise 3-5 Net present value method IV A company is considering buying new hardware and software. The manufacturer submits three different offers.

1. Immediate purchase of the equipment for € 10,200.

2. Closure of a leasing contract with leasing payments of € 2,400 at the beginning of each year.

3. Closure of a leasing contract with leasing payments of € 2,500 at the beginning of each year over 2 years, and at the beginning of year 3 purchase of the equipment leased so far at €5,200.

For your calculations assume an economic life of 5 years. The appropriate discount rate is 4%.

a) Rank the different offers by their net present value.

b) How might the investment decision change if the discount rate increased from 4 % to 10%?

c) What would your revised investment decision advice be with regard to your calculations in question a if you could negotiate a deferral of payment so that the initial outlay from offer 1 has to be paid at the end of the economic life?