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 Corporation. The machine can be used for 12 years and then sold for $26,000 at the end of its useful life. Lollie has presented Kiddy with the following options: 1. Buy machine. The machine could be purchased for $176,000 in cash. All maintenance costs, which approximate $21,000 per year, would be paid by Kiddy. 2. Lease machine. The machine could be leased for a 12-year period for an annual lease payment of $41,000 with the first payment due immediately. All maintenance costs will be paid for by the Lollie Corporation and the machine will revert back to Lollie at the end of the 12-year period. Required: Assuming that a 11% interest rate properly reflects the time value of money in this situation and that all maintenance costs are paid at the 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, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Buy option Lease option Kiddy should choose Lease PV
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 Corporation. The machine can be used for 12 years and then sold for $26,000 at the end of its useful life. Lollie has presented Kiddy with the following options: 1. Buy machine. The machine could be purchased for $176,000 in cash. All maintenance costs, which approximate $21,000 per year, would be paid by Kiddy. 2. Lease machine. The machine could be leased for a 12-year period for an annual lease payment of $41,000 with the first payment due immediately. All maintenance costs will be paid for by the Lollie Corporation and the machine will revert back to Lollie at the end of the 12-year period. Required: Assuming that a 11% interest rate properly reflects the time value of money in this situation and that all maintenance costs are paid at the 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, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) Buy option Lease option Kiddy should choose Lease PV
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
Related questions
Question
Domestic
Transcribed Image Text: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 Corporation. The machine can be used for
12 years and then sold for $26,000 at the end of its useful life. Lollie has presented Kiddy with the
following options:
1. Buy machine. The machine could be purchased for $176,000 in cash. All maintenance costs,
which approximate $21,000 per year, would be paid by Kiddy.
2. Lease machine. The machine could be leased for a 12-year period for an annual lease
payment of $41,000 with the first payment due immediately. All maintenance costs will be paid
for by the Lollie Corporation and the machine will revert back to Lollie at the end of the 12-year
period.
Required:
Assuming that a 11% interest rate properly reflects the time value of money in this situation and that
all maintenance costs are paid at the 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, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
Buy option
Lease option
Kiddy should choose
Lease
PV
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education