Lettwinn Corporation is planning to acquire some new equipment from Clifton Company and has asked you to assist in analyzing the situation. The equipment may be purchased for \(\$ 415,000\) and then will be leased by Lettwinn under a 10 -year lease contract to a customer for \(\$ 75,000\) payable at the end of each year. After the lease expires, Lettwinn expects to sell the equipment for \(\$ 115,000\).

1. Suppose Lettwinn has \(\$ 415,000\) cash available to buy the equipment and requires a \(14 \%\) rate of return on its investments. Should the company buy the equipment and lease it to the customer?

2. As an alternative to paying cash, Lettwinn can invest the \(\$ 415,000\) in other operations for five years and earn 14\% annually on its investment. If this is done, the equipment may be purchased by signing a \(\$ 750,000\), five-year, noninterest-bearing note payable to Clifton Company. Should Lettwinn pay \(\$ 415,000\) now or sign the \(\$ 750,000\) note?

3. Now suppose Lettwinn does not have the option of signing a \(\$ 750,000\), fiveyear, noninterest-bearing note. Instead, the company may either pay \(\$ 415,000\) cash or lease the equipment from Clifton Company for eight years, after which the equipment would become the property of Lettwinn. The lease contract would require \(\$ 93,750\) payments at the end of each year. If Lettwinn leases the equipment, it will invest the \(\$ 415,000\) available cash in other operations and earn \(14 \%\) on the investment. Should Lettwinn pay cash or lease the equipment from Clifton?

Provocative Problem 10-3 Archery Unlimited Company

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