Knowles College recently constructed a new academic building and is deciding whether it should lease or purchase the media equipment for its classrooms. If the College chooses to lease the equipment, it will be required to make annual payments of $50,000. The lease requires that payments be made at the beginning of each year for the duration of the lease, which is 7 years. If the College purchases the equipment, it will cost $315,000. In addition to the upfront cost, the equipment will require $19,000 in maintenance at the end of years 2, 4, and 6. The useful life of the equipment is estimated to be 7 years, at which point the College estimates it will be able to sell the equipment for $62,000. The College uses a discount rate of 4.25%. Fill in the following blanks: [Note: Write only POSITIVE numbers e.g. even if Excel gives you -253 or (253), write 253. Also, round your numbers to TWO decimal places e.g. 253.12] A) Present value of the lease option is: $ B) Present value of the purchase option is: $ C) Which option should Knowles College choose? ___ [Write 1 if "Lease", or 2 if "Purchase"] D) Would your answer to part C) change if the discount rate is 3.5%? ____ [Write 1 if Yes, or 2 if No]
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Time Value of Money
Knowles College recently constructed a new academic building and is deciding whether it should lease or purchase the media equipment for its classrooms. If the College chooses to lease the equipment, it will be required to make annual payments of $50,000. The lease requires that payments be made at the beginning of each year for the duration of the lease, which is 7 years. If the College purchases the equipment, it will cost $315,000. In addition to the upfront cost, the equipment will require $19,000 in maintenance at the end of years 2, 4, and 6. The useful life of the equipment is estimated to be 7 years, at which point the College estimates it will be able to sell the equipment for $62,000. The College uses a discount rate of 4.25%.
Fill in the following blanks:
[Note: Write only POSITIVE numbers e.g. even if Excel gives you -253 or (253), write 253. Also, round your numbers to TWO decimal places e.g. 253.12]
A) Present value of the lease option is: $
B) Present value of the purchase option is: $
C) Which option should Knowles College choose? ___ [Write 1 if "Lease", or 2 if "Purchase"]
D) Would your answer to part C) change if the discount rate is 3.5%? ____ [Write 1 if Yes, or 2 if No]
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
