Tele-KC a small competitor of Vodafone Plc is also considering an investment in 5G technology. The company is pricing each phone mast and can either lease or buy the machinery.
The purchase price is KD 10,000 and the machine has a 5-year life. If it buys the machine Tele-KC will need to fund it using capital that costs them 9% per year.
Alternatively, the lease payments will be KD 2,100 per year for 5 years with rentals payable at the start of each year.
a. What are the respective present value costs of purchasing the machine or leasing it?
b. Explain the reasoning for the differences in cost linking to fundamentals of finance theory.