Concept explainers
a.
To determine: The NPV of purchasing and leasing.
Introduction:
The Net Present Value (NPV) is the distinction between the present value of
b.
To determine: The equivalent monthly annual benefit of both opportunities.
c.
To determine: Whether purchasing or leasing option should be opt.
Leasing option:
Leasing has option that in five years a five-year-old cab will cost either $10,000 or $16,000 with equal likelihood, will have maintenance costs of $500 per month, and will last three more years.
Want to see the full answer?
Check out a sample textbook solutionChapter 22 Solutions
EBK CORPORATE FINANCE
- Chris Svenson is trying to decide whether to lease or purchase a new car costing $18,000. If he leases, he’ll have to pay a $600 security deposit and monthly payments of $425 over the 36-month term of the closed-end lease. On the other hand, if he buys the car then he’ll have to make a $2,400 down payment and will finance the balance with a 36-month loan requiring monthly payments of $515; he’ll also have to pay a 6 percent sales tax ($1,080) on the purchase price, and he expects the car to have a residual value of $6,500 at the end of 3 years. Chris can earn 4 percent interest on his savings. Use the automobile lease versus purchase analysis form to find the total cost of both the lease and the purchase and then recommend the best strategy for Chris.arrow_forwardYou need a particular piece of equipment for your production process. An equipment - leasing company has offered to lease the equipment to you for $ 9 comma 500 per year if you sign a guaranteed 5-year lease (the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease. Alternatively, you could buy and maintain the equipment yourself. The cash flows from doing so are listed below (the equipment has an economic life of 5 years). If your discount rate is 6.7%. what should you do? Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 negative $ 40 comma 800 negative $ 2 comma 200 negative $ 2 comma 200 negative $ 2 comma 200 negative $ 2 comma 200 negative $ 2 comma 200 Question content area bottom Part 1 The net present value of the leasing alternative is $ enter your response here. (Round to the nearest dollar.)arrow_forwardA car dealer leases a small computer with software for $5000 per year. As an alternative he could buy the computer for $7500 and lease the software for $3500 per year. Any time he would decide to switch to some other computer system he could cancel the software lease and sell the computer for $500. (a) If he buys the computer and leases the software, what is the payback period? (b) If he kept the computer and software for 8 years, what would be the benefit–cost ratio, based on a 5% interest rate?arrow_forward
- Agata Bertina wants to open a new factory in New Jersey. The company can either purchase or lease the factory. There are three options available for Agata Bertina : 1. Purchase a factory with a useful life of 10 years today for $700,000 in cash. This factory has no additional space for rent. 2. Lease a factory with annual lease payments of $45,000 for 10 years. Payments are made at the beginning of each year. 3. Purchase a factory with a useful life of 10 years today for $745,000. In addition, the company can rent some additional space for annual rent of $4,000. Assume Agata Bertina would receive the rental payments at the end of each year. Requirement: Interest is compounded annually. Which option should Agata Bertina choose given a 3% interest rate? First, calculate the present value of each option. (Ignore any depreciation expense for purposes of this problem. Use the present value and future value tables, the formula method, a financial calculator,…arrow_forwardAfter deciding to acquire a new car, you realize you can either lease the car or purchase it with a two-year loan. The car you want costs $34,000. The dealer has a leasing arrangement where you pay $97 today and $497 per month for the next two years. If you purchase the car, you will pay it off in monthly payments over the next two years at an APR of 6 percent. You believe that you will be able to sell the car for $22,000 in two years. What is the present value of purchasing the car? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Present value of lease $ What is the present value of leasing the car? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Present value of purchase $ What break-even resale price in two years would make you indifferent between buying and leasing? (Do not round intermediate calculations and round your answer to 2…arrow_forwardYour 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?arrow_forward
- Ben Halls is trying to decide whether to lease or purchase a new car costing $18,000. If he leases, he’ll have to pay a $600 security deposit and monthly payments of $450 over the 36-month term of the closed-end lease. Ben could earn 1% on the amount of any down payment or security deposit. On the other hand, if he buys the car then he’ll have to make a $2,400 down payment and will finance the balance with a 36-month loan with a 4% interest rate; he’ll also have to pay a 6 percent sales tax ($1,080) on the purchase price, and he expects the car to have a residual value of $6,500 at the end of 3 years. Ben can earn 4 percent interest on his savingsarrow_forwardSuppose you work for a data processing company who needs a new supercomputer now. Your company can either buy the supercomputer for $400,000 or lease it from a computer leasing company through an operating lease. The maintenance will be provided by the leasing company. Your company will not incur any other costs except the lease payment. But the annual maintenance cost will cost the leasing company$25,000 per year for four years. The lease terms require your company to make four annual payments at the beginning of each year. The computer could be depreciated for tax purposes straight-line over four years and it will have no residual value at the end of year 4. The interest rate is 12%. Suppose the tax rate paid by your company is 21% but the leasing company pays only 15% tax due to carried over losses from their previous operation. What is the pre-tax lease payment amount that will help the leasing company break even within 4 years if it requires 8% return. What is the NPV of the…arrow_forwardAfter deciding to acquire a new car, you can either lease the car or purchase it with a three-year loan. The car you want costs $37,000. The dealer has a leasing arrangement where you pay $2,400 today and $580 per month for the next three years. If you purchase the car, you will pay it off in monthly payments over the next three years at an APR of 6 percent. You believe that you will be able to sell the car for $22,000 in three years. a. What is the present value of leasing the car? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the present value of purchasing the car? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. What break-even resale price in three years would make you indifferent between buying and leasing?arrow_forward
- Reynolds Construction (RC) needs a piece of equipment that costs $100,000. The equipment has an economic life of 2 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 10% with payments due at the end of the year. Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.) What is the initial lease liability that must be reported on the balance sheet? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent. What will RC report as an interest expense at Year 1? Round your answer to the nearest cent. Enter your…arrow_forwardPlease show proper steps.arrow_forwardReynolds Construction (RC) needs a piece of equipment that costs $150,000. The equipment has an economic life of 3 years and no residual value. The equipment will not require maintenance because its useful life is so short. RC can borrow the full cost of the equipment at an interest rate of 7% with payments due at the end of the year. Alternatively, RC can lease the equipment for $55,000 with payments due at the end of the year. Assume RC chooses the lease, which is a finance lease for financial reporting purposes. Answer the following questions. (Hint: See Table 19-1.) What is the initial lease liability that must be reported on the balance sheet? Do not round intermediate calculations. Round your answer to the nearest cent. Enter your answer as a positive value. $ What is the initial right-of-use asset? Do not round intermediate calculations. Round your answer to the nearest cent. $ What will RC report as an interest expense at Year 1? Round your answer to the nearest cent.…arrow_forward
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education