Problem 5-13 (Algo) Lease vs. buy alternatives [LO5-3, 5-8, 5-10]Kiddy Toy Corporation needs to acquire the use of a machine to be used in its manufacturing process. The machine needed ismanufactured by Lollie Corporation. The machine can be used for 10 years and then sold for $27,000 at the end of its useful life. Lolliehas presented Kiddy with the following options:1. Buy machine. The machine could be purchased for $177,000 in cash. All maintenance costs, which approximate $22,000 peryear, would be paid by Kiddy.2. Lease machine. The machine could be leased for a 10-year period for an annual lease payment of $42,000 with the first paymentdue immediately. All maintenance costs will be paid for by the Lollie Corporation and the machine will revert back to Lollie at thend of the 10-year period.Required:Assuming that a 10% interest rate properly reflects the time value of money in this situation and that all maintenance costs are paid atthe end of each year, determine which option Kiddy should choose. Ignore income tax considerations.Note: Round your final answers to nearest whole dollar amount. Use tables, Excel, or a financial calculator. (FV of $1, PV of $1, FVAof $1, PVA of $1, FVAD of $1 and PVAD of $1)Buy optionLease optionKiddy should choosePV

Here,Details of Buying Option: Purchase Price of Machine -$1,77,000.00Life of Machine in…

Answered: Kiddy Toy Corporation needs to acquire…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The Sweetwater Candy Company would like to buy a new machine that would automatically "dip" chocolates. The dipping operation currently is done largely by hand. The machine the company is considering costs $230,000. The manufacturer estimates that the machine would be usable for five years but would require the replacement of several key parts at the end of the third year. These parts would cost $10,400, including installation. After five years, the machine could be sold for $7,500. The company estimates that the cost to operate the machine will be $8,400 per year. The present method of dipping chocolates costs $44,000 per year. In addition to reducing costs, the new machine will increase production by 6,000 boxes of chocolates per year. The company realizes a contribution margin of $1.55 per box. A 13% rate of return is required on all investments. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. (Use the tables to get…
Scription Inc. has additional cash available for investment and considers replacing the old factory equipment with a new one. There are two options for Scription. One option is to purchase a new equipment from Supplier A for $100,000. Supplier A equipment has a useful life of 10 years with after-tax residual value, $5,000 and can save $60,000 annually. The other option is with Supplier B. Supplier B would charge $120,000 for a new equipment. Supplier B equipment would generate $50,000 annual cost saving. Its useful life is 12 years and the after-tax residual value of $6,000. Assume the required rate of return for both options is 8%. Using NPV method, determine which option is the more attractive. Must show your computation steps. Use the appropriate tables in Appendix A to obtain the relevant present value factor and round up your final answer to the nearest dollar.
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A machine costs $250,000 to purchase and will provide $60,000 a year in benefits. The company plans to use the machine for 12 years and then will sell the machine for scrap, receiving $15,000. The company interest rate is 10%. Should the machine be purchased? 5-4 A IBP Inc. is considering establishing a new machine to automate a meatpacking process. The machine will save $55,000 in labor annually. The machine can be purchased for $225,000 today and will be used for 10 years. It has a salvage value of $12,500 at the end of its useful life. The new machine will require an annual maintenance cost of $11,000. The corporation has a minimum rate of return of 9%. Do you recommend automating the process?
Kiddy Toy Corporation needs to acquire the use of a machine to be used in its manufacturing process. The machine needed is manufactured by Lollie Corp. The machine can be used for 10 years and then sold for $10,000 at the end of its useful life. Lollie has presented Kiddy with the following options: 1. Buy machine. The machine could be purchased for $160,000 in cash. All maintenance and insurance costs, which approximate $5,000 per year, would be paid by Kiddy. 2. Lease machine. The machine could be leased for a 10-year period for an annual lease payment of $25,000 with the first payment due immediately. All maintenance and insurance costs will be paid for by the Lollie Corp. and the machine will revert back to Lollie at the end of the 10-year period. Required: Assuming that a 12% interest rate properly reflects the time value of money in this situation and that all maintenance and insurance costs are paid at the end of each year, determine which option Kiddy should choose. Ignore…
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