Question
The management of The Alexandrov Company decided to acquire the use of a machine to be used in its manufacturing process. The machine is manufactured
The management of The Alexandrov Company decided to acquire the use of a machine to be used in its manufacturing process. The machine is manufactured only by Chang, Incorporated. The machine would have a useful life of ten years and would then be sold for $10,000 at the end of its useful life. Changs management has presented Alexandrov with the following acquisition options:
Lease: The machine could be leased for an eight-year period for an annual lease payment of $25,000, with the first payment due on the date that the agreement is signed. Related annual executory costs (maintenance and insurance expenses for the machine), which are expected to be about $5,000 per year, would be paid by Alexandrov.
Purchase: The machine could be purchased for $130,000 in cash. The related maintenance and insurance costs would also become the additional responsibility of Alexandrov.
Assume that (1) Alexandrov and Chang will agree on a transaction on November 30, 2020; and (2) the current interest rate for Alexandrovs lease arrangements is 12%, but the rate applicable to annual maintenance and insurance expenses is only 8%.
Prepare a schedule showing the alternatives available to The Alexandrov Company for the acquisition of the equipment.
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