15.

Dunay Corporation is considering purchasing a corporate jet. The plane can either be purchased or leased from the manufacturer. The purchase price would be $850,000 with the following costs to be incurred:

Annual costs of servicing, licensing $9,000

Repairs

First three years, per year $3,000

Fourth year $5,000

Fifth year $10,000

The plane would be sold after 5 years for 50% of the purchase price. The lease alternative would require an initial deposit of $50,000 and run for five years. The lease would require annual rent payments of $200,000. As a part of the lease cost the manufacturer would provide all servicing, repairs and licensing. The company requires a rate of return of 18%. Required: Which alternative would you recommend and why?