Question
EXERCISE 2: LEASING VERSUS BUYING You have two options: to buy or to lease a video store. Option 1: Purchase Year 0 Cost $300,000 1
EXERCISE 2: LEASING VERSUS BUYING
You have two options: to buy or to lease a video store.
Option 1: Purchase
| Year |
|
|
| 0 | Cost | $300,000 |
| 1 | Additional cost | 80,000 |
| 1 | Cash flow from operations | 45,000 |
| 2 | Cash flow from operations | 70,000 |
| 3 | Cash flow from operations | 90,000 |
| 4 | Cash flow from operations | 105,000 |
| 5 | Cash flow from operations | 140,000 |
| 6 | Cash flow from operations | 160,000 |
| 7 | Cash flow from operations | 165,000 |
| 8 | Cash flow from operations | 170,000 |
| 9 | Cash flow from operations | 175,000 |
| 10 | Cash flow from operations | 180,000 |
| 11 | Cash flow from sale of business | 400,000 |
If you want to make 25% on your money, should you buy the video store? To answer this question, calculate the following:
1. Net present value
2. Internal rate of return
Option 2: Leasing
You can lease a video store in another town. The net yearly cash flow from operations after deducting lease payments is estimated at $45,000 (net) from year 1 to year 10.
1. If you want to make 25% on your investment, should you lease the video store?
2. Which of the two options would you choose?
- Why are capital projects critical?
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Multinational Business Finance
Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett
13th edition
132743469, 978-0132743464
