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 (EV of $1. PV of $1. EVA of $1. PVA of $1. EVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1. Buy machine. The machine could be purchased for $160,000 in cash. All 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 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 income tax considerations. (Negotive. amounts should be indicated by a minus sign. Round your final answers to nearest whole dollar amount)

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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Question
X Answer is complete but not entirely correct.
Buy option
Lease option
Kiddy should
choose
EA
69
Buy
PV
185,031 X
158,206 X
Transcribed Image Text:X Answer is complete but not entirely correct. Buy option Lease option Kiddy should choose EA 69 Buy PV 185,031 X 158,206 X
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 (EV of $1. PV of $1. EVA of $1. PVA of $1. FVAD of $1 and PVAD of $1) (Use appropriate
factor(s) from the tables provided.)
1. Buy machine. The machine could be purchased for $160,000 in cash. All 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 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 income tax considerations. (Negative
amounts should be indicated by a minus sign. Round your final answers to nearest whole dollar amount.)
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 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 (EV of $1. PV of $1. EVA of $1. PVA of $1. FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) 1. Buy machine. The machine could be purchased for $160,000 in cash. All 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 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 income tax considerations. (Negative amounts should be indicated by a minus sign. Round your final answers to nearest whole dollar amount.)
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