Problem 3:

The BSC Company Ltd. is considering whether to purchase or lease a new high speed packaging machine. The following information is at their disposal:-

Capital cost of machine = RO.39,000

Expected Life of Machine = 10 Years

Scrap value of machine = RO 5,000

Maintenance cost in first year = RO 500

Annual increase in cost of maintenance per year after first year = RO.200

Annual cost of leasing machine = RO.7,850

Maintenance costs are deemed to occur at the end of an operating year while the lease payments would be payable at the beginning of the operating year.

(i) Using the above information, calculate the Net Present Cost of both courses of action when the company values money at 16%

(ii) What course of action should the company take (give reasons for your answer)?