Question
Company XYZ wants to acquire a machine for its manufacturing facility, but is unsure whether it should lease or buy. The facts are as follows:
Company XYZ wants to acquire a machine for its manufacturing facility, but is unsure whether it should lease or buy. The facts are as follows:
Buy:
The cost of the machine at the beginning of year 1 is $110,000. At the end of year 4, XYZ will dispose of the machine for a salvage value of $10,000. Assume the interest rate is 10%.
Lease:
To lease the machine, XYZ must make 4 equal payments of $32,000 at the end of year 1, year 2, year 3 and year 4. Assume the interest rate is 10%.
Required:
Compute the present values of buying vs. leasing the machine and state which is the better deal.
(You may use one or both of the two present value tables I have provided to you). You will not receive any credit if you simply write buy or lease you must write out the present value computation
for both alternatives to receive any credit.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started