Time line of cash flow and the present value of an annuity

due.

Mauer Mining Company leases a special drilling press with annual payments of

$100,000.

The contract calls for rent payments at the beginning of each year for a minimum of

6

years. Mauer Mining can buy a similar drill for

$480,000,

but it will need to borrow the funds at

8%.

a.Show the two choices on a timeline with the cash flow.

b.Determine the present value of the lease payments at

8%.

c.Should Mauer Mining lease or buy this drill?

Question content area bottom

Part 1

a.Which of the following figures correctly shows the two choices on a timeline with the cash flow?(Select the best response.)

A.

T0

T1

T2

T3

T5

T6

$100,000

$100,000

$100,000

$100,000

$100,000

$480,000

Lease

Loan

12

B.

T0

T1

T2

T3

T5

T6

$100,000

$100,000

$100,000

$100,000

$100,000

$480,000

Lease

Loan

$480,000

$480,000

$480,000

$480,000

12

C.

T0

T1

T2

T3

T5

T6

$100,000

$100,000

$100,000

$100,000

$100,000

$480,000

Lease

Loan

12

D.

T0

T1

T2

T3

T5

T6

$100,000

$100,000

$100,000

$100,000

$100,000

$480,000

Lease

Loan

12

Part 2

b.What is the present value of the lease payments at

8%

interest rate?

$enter your response here

(Round to the nearest cent.)

Part 3

c.Should Mauer Mining lease or buy this drill?(Select the best response.)

A.Mauer Mining should lease the drill since the present value of the lease payments is less than the price of the drill.

Mauer Mining should lease the drill since the present value of the lease payments is less than the price of the drill.

B.Mauer Mining should buy the drill since the present value of the lease payments is greater than the price of the drill.

Mauer Mining should buy the drill since the present value of the lease payments is greater than the price of the drill.

C.Mauer Mining should buy the drill since the present value of the lease payments is less than the price of the drill.

Mauer Mining should buy the drill since the present value of the lease payments is less than the price of the drill.

D.Mauer Mining should lease the drill since the present value of the lease payments is greater than the price of the drill.

Mauer Mining should lease the drill since the present value of the lease payments is greater than the price of the drill.