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Bronzeville Products wants an airplane for use by its corporate staff. The airplane that the company wishes to acquire, a Zephyr II , can be
Bronzeville Products wants an airplane for use by its corporate staff. The airplane that the company wishes to acquire, a Zephyr II can be either purchased or leased from the manufacturer. The company has made the following evaluation of the two alternatives:
Purchase alternative. If the Zephyr II is purchased, then the costs incurred by the company would be as follows:
Purchase cost of the plane $
Annual cost of servicing, licenses, and taxes $
Repairs:
First three years, per year $
Fourth year $
Fifth year $
The plane would be sold after five years. Based on current resale values, the company would be able to sell it for about onehalf of its original cost at the end of the fiveyear period.
Lease alternative. If the Zephyr II is leased, then the company would have to make an immediate deposit of $ to cover any damage during use. The lease would run for five years, at the end of which time the deposit would be refunded. The lease would require an annual rental payment of $the first payment is due at the end of Year As part of this lease cost, the manufacturer would provide all servicing and repairs, license the plane, and pay all taxes. At the end of the fiveyear period, the plane would revert to the manufacturer, as owner.
Bronzeville Products required rate of return is Ignore income taxes.
Click here to view Exhibit B and Exhibit B to determine the appropriate discount factors using tables.
Required:
a
Use the totalcost approach to determine the present value of the cash flows associated with purchase alternative. Use the appropriate table to determine the discount factors and round final answers to the nearest dollar amount.
b
Use the totalcost approach to determine the present value of the cash flows associated with lease alternative. Use the appropriate table to determine the discount factors and round final answers to the nearest dollar amount.
Which alternative should the company accept?
multiple choice
Lease alternative
Purchase alternative
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