Explanation Solution: Present Value: It refers to the value of an amount today after considering the time value of money and the discounted rate. In other words, it is discounted value of the amount to be received in future. a. Purchase Option: Given, The amount to be spent on purchase now is $100,000. The annual payment to be made at the end of each year is $3,000. The residual value to be received at the end of life of refrigerator is $15,000. Total time period is 15 years. Rate of interest is 10% compounded annually. Formula to calculate the present value of ordinary annuity is: P V = P M T × ( 1 − 1 ( 1 + I ) n I ) Where, PV is the future value. PMT is the period payment. I is the rate of interest. n is the time period. Substitute $3,000 for PMT , 10% for I and 15 for n in the above formula, P V = $ 3 , 000 × ( 1 − 1 ( 1 + 10 % ) 15 10 % ) = $ 3 , 000 × 7.60608 = $ 22 , 818.24 Present value of annual maintenance cost is $22,818.24. Formula to calculate present value is: P V = F V ( 1 + I ) n Substitute $15,000 for FV , 10% for I and 15 for n in the above formula, P V = $ 15 , 000 ( 1 + 10 % ) 15 = $ 15 , 000 × 0

1st Edition

ISBN: 9780132162302

Author: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella

Publisher: PEARSON

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Chapter 7, Problem 7.12P

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The option that F should choose.

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The option that F should choose.

Solution Summary: The author explains that the cost under leasing option is lesser than the purchasing option, so the leasing should be chosen by F.

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