a.
Describe whether Person GD would prefer to lease or purchase the technology if the manager of GD is evaluated using
a.

Explanation of Solution
Return on investment:
Return on investment is the amount of total profit earned by a division with its assets. The return on investment is used to check the efficiency of the unit. It shows the efficiency of the unit to utilize its assets to generate the profit.
Describe whether Person GD would prefer to lease or purchase the technology if the manager of GD is evaluated using return on investment (ROI):
Return on investment when purchased:
Return on investment when leased:
Working note 1:
Compute the value of Annual amortization:
From the above calculation, it is clear that the manager should prefer lease.
b.
Describe whether Person GD would prefer to lease or purchase the technology if the manager of GD is evaluated using residual income.
b.

Explanation of Solution
Investment in the project:
The investment in the project is a very important decision. Before selecting the project, the management should consider the profitability of the project with the help of present value,
The residual incomes of the two options are as follows:
Residual incomes when purchased:
Residual incomes when leased:
From the above calculation, it is clear that the manager should prefer purchase.
c.
Describe the lease payment that the manager would make indifferent between leasing and purchasing the technology if the manager of GD is evaluated using return on investment (ROI).
c.

Explanation of Solution
Describe the lease payment that the manager would make indifferent between leasing and purchasing the technology if the manager of GD is evaluated using return on investment (ROI):
Note: Assume that the breakeven lease payment as X.
d.
Describe the lease payment that the manager would make indifferent between leasing and purchasing the technology the manager of GD is evaluated using residual income.
d.

Explanation of Solution
Describe the lease payment that the manager would make indifferent between leasing and purchasing the technology the manager of GD is evaluated using residual income:
Note: Assume that the breakeven lease payment as X.
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Chapter 14 Solutions
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