Kotse Automotive is planning to expand its operation by planning to add a machine costing $90,000. The company is facing two possible options which are Option 1 - Lease arrangement which will require the company to pay $15,000 for 5 years and an option to purchase at $20,000 at the end of the lease Option 2 - Purchase the machine thru debt financing which would require the company to pay $20,000 for 5 years. The company is expected to spend $1,000 every year for 5 years for the machines repairs and maintenance. Which of the two options should the company choose if costs of debt is at 9%?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Kotse Automotive is planning to expand its operation by planning to add a machine costing $90,000. The company is facing two possible options which are

  • Option 1 - Lease arrangement which will require the company to pay $15,000 for 5 years and an option to purchase at $20,000 at the end of the lease
  • Option 2 - Purchase the machine thru debt financing which would require the company to pay $20,000 for 5 years. The company is expected to spend $1,000 every year for 5 years for the machines repairs and maintenance.

Which of the two options should the company choose if costs of debt is at 9%? 

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