Answered: If interest charge for leasing is 8%,…

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If interest charge for leasing is 8%, which is more favorable for the businessman, borrow and buy or lease?

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 13EB: Conestoga Plumbing plans to invest in a new pump that is anticipated to provide annual savings for...

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

A businessman plans to purchase a new house costing P500000. He can raise the building by issuing a 10%, 25 year old bond that would pay P150000 interest per year and repay the face amount at maturity Instead of buying the new house, he has the option of leasing it for P140000 per year, the first payment due one year fron now. The building has an expected life for 25 years, If interest charge for leasing is 8%, which is more favorable for the businessman, borrow and buy or lease?

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