Your engineering firm needs a rapid prototyping machine.   The company gives you two options.  In Option 1 you purchase the machine outright for $50,000, pay a maintenance contract of $1,000 per year, and expect to be able to resell the machine after 10 years at a salvage value of $10,000.  In Option 2, you lease the machine at $7,000 per year and pay no maintenance, but receive no salvage.  Assume that you will be able to take in $8,000 per year in income from this machine.  Also assume that an additional option is not to buy the machine at all, but to put the money in the bank at 5% interest.  Which option will be best for the firm?

Your engineering firm needs a rapid prototyping machine.   The company gives you two options.  In Option 1 you purchase the machine outright for $50,000, pay a maintenance contract of $1,000 per year, and expect to be able to resell the machine after 10 years at a salvage value of $10,000.  In Option 2, you lease the machine at $7,000 per year and pay no maintenance, but receive no salvage.  Assume that you will be able to take in $8,000 per year in income from this machine.  Also assume that an additional option is not to buy the machine at all, but to put the money in the bank at 5% interest.  Which option will be best for the firm?

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

10th Edition

ISBN:9781337902571

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter12: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 10P: Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6...

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