Problem 13-22 Net Present Value Analysis of a Lease or Buy Decision [LO1]

Blinko 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$850,000Annual cost of servicing, licenses, and taxes$9,000Repairs:First three years, per year$4,000Fourth year$6,000Fifth year$12,000The plane would be sold after five years. Based on current resale values, the company would be able to sell it for about one-half of its original cost at the end of the five-year period.

Lease alternative.If the Zephyr II is leased, then the company would have to make an immediate deposit of $56,000 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 $150,000 (the first payment is due at the end of Year 1). 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 five-year period, the plane would revert to the manufacturer, as owner.

Blinko Products? required rate of return is 10%. (Ignore income taxes.)Click here to viewExhibit 13B-1andExhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:1a.Use the total-cost approach to determine the present value of the cash flows associated with purchase alternative.(Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Present value of cash outflows with purchase alternative$1b.Use the total-cost approach to determine the present value of the cash flows associated with lease alternative.(Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

WIDWIHQ BVEIIJBIIOI'I or [\"8 [W0 BIIEITIEIWESI Purchase alremativa. ll the Zephyr II is purchased, then the costs incurred by the company would he as follows: Purchase cost of the plane $050,000 Annual cost of servicing. licensesI and taxes $ 0,000 Repairs: First three years, per year $ 4,000 Fourth year $ 5,000 Fifth year $ 12,000 The plane would he sold after ve 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 ve-year period. Lease alternative. If the Zephyr II is leased. then the company would have to make an immediate deposit of $50,000 to cover any damage during use. The lease would run for ve years. at the end of which time the deposit would be refunded. The lease would require an annual rental payment of $150,000 {the rst payment is due at the end of Year 1}. As part ot this lease cost. the manufacturer would provide all servicing and repairsI license the plane, and pay all taxes. At the end of the veyear period, the plane would revert to the manufacturer. as owner. Blinko Products' required rate o'l return is 10%. (Ignore income taxes.) Click here to view Exhibit 133-1 and Exhibit 13B-2. to determine the appropriate discount factort's} using tables. Required: 1:. Use the totalcost approach to determine the present value of the cash ows associated with purchase alternative. [Negative amount should be indicated by a minus sign. Round discount factorts] to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the \"5" sign in your response.) Present value of cash outow with purchase alternative $ |:| 'lb. Use the totalcost approach to determine the present value of the cash ows associated with lease alternative. [Negative amount should be indicated by a minus sign. Round discount factonfs] to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the \"5" sign in your response.) Presentvalueofcashoutmwilhleasealtamalivo 5|:l