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Assuming that maintenance and insurance costs are paid at year-end and an interest rate of 10% compounded annually, which option should Fata choose?

Assuming that maintenance and insurance costs are paid at year-end and an interest rate of 10% compounded annually, which option should Fata choose?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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P7-12. Present Value of an Ordinary Annuity, Purchase or Lease Analysis. Fata Food Emporium decides to obtain a new refrigerator to store its meat and produce. The refrigerator has a 15-year useful life and can be sold for $15,000 at the end of its useful life. Fata has two options: a. Purchase the Refrigerator: Purchase the refrigerator in cash for $100,000. Fata would have to pay all maintenance/insurance costs, which would be $3,000 per year. b. Lease the Refrigerator: Lease the refrigerator for a 15-year period. Annual lease payments amount to $15,000 with the first payment beginning at the end of the year. The seller will pay maintenance and insurance costs, and Fata will return the refrigerator to the seller after 15 years. Assuming that maintenance and insurance costs are paid at year-end and an interest rate of 10% compounded annually, which option should Fata choose?
Transcribed Image Text:P7-12. Present Value of an Ordinary Annuity, Purchase or Lease Analysis. Fata Food Emporium decides to obtain a new refrigerator to store its meat and produce. The refrigerator has a 15-year useful life and can be sold for $15,000 at the end of its useful life. Fata has two options: a. Purchase the Refrigerator: Purchase the refrigerator in cash for $100,000. Fata would have to pay all maintenance/insurance costs, which would be $3,000 per year. b. Lease the Refrigerator: Lease the refrigerator for a 15-year period. Annual lease payments amount to $15,000 with the first payment beginning at the end of the year. The seller will pay maintenance and insurance costs, and Fata will return the refrigerator to the seller after 15 years. Assuming that maintenance and insurance costs are paid at year-end and an interest rate of 10% compounded annually, which option should Fata choose?
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