Question
Partex Ltd. is considering the purchase of new laser technology. The equipment can be purchased for $500,000 and is expected to last 5 years. At
Partex Ltd. is considering the purchase of new laser technology. The equipment can be purchased for $500,000 and is expected to last 5 years. At the end of its life, the machine can be sold for scrap parts and should generate $50,000 in revenue. Partex has also been advised that the service contract on the new equipment will cost $2,000 per month. If Partex decides not to undertake the service contract, there will not be any warranty on the new equipment.
Another option is to lease the new equipment for $12,500 per month; no other cost is incurred, as the lease includes the service contract.
If Partex can earn 8%, compounded annually, would it be better to buy or to lease? Use present value to evaluate each option, since this would represent todays value of each option to Partex, and the option with the lowest present value will represent the least cost to the company.
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