Accounting Information for Decision Making - Text 2nd edition

Trasky company is trying to decide whether it should purchase or lease new automated machine to be in production of a new product.

Iif purchased, new machine would cost $100,000 and be used for 10 years. The salvage value at end of 10 years is estimated at $20,000. Machine would be depreciated using straight line depreciation over 7 year period. Annual maintenance and operating costs would be $20,000. Annual revenues are estimated $55,000.

If machine leased, company pay annual lease payments of 20,700. 1st lease payment and deposit of $5,000 are due immediately. Last payment is paid at beginning of year 10. Deposit is refunadble at end of 10th year. In additional under normal contract , must pay all maintance and operating costs, although leasing company does offer service contact that will provide annual maintenance and operating costs by 10,000. Trasky cost 12%. Tax rate 40%. Service contract be expensed over 10 year period.

A) Calculate NPV for purchase, lease without the service contract, and the lease witht he service contract.

B) Whcih is the best alternative?

Can you please break it down with the anwers. Show the problem please. So I can comprehend it better. Thanks