Question
25. You are presented with the following information with regards to the financial evaluation of the decision to acquire an asset as well as the
25. You are presented with the following information with regards to the financial evaluation of the decision to acquire an asset as well as the method of acquisition (from the asset user's perspective):
(i) NPV(Lease vs Buy) =-$35,000
(ii) Net cash flows for a project is $20,000 per year end for three years with an initial cost of $25,000, salvage value of zero and an opportunity cost of capital of 10% per annum. Assume a tax rate of zero.
On the basis of this information which of the following statements are true?
a) This asset should not be acquired irrespective of whether it is leased or purchased.
b) This asset should be acquired irrespective of whether it is leased or purchased.
c) This asset should only be acquired via a lease.
d) This asset should only be acquired via an outright purchase.
e) On the basis of the information provided, we are unable to make a decision about whether or not the asset should be acquired
The provided correct answer is d), but I do not understand why. Please provide detailed steps on how to calculate the NPV of (ii) and an explanation of why the answer is d).
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