Question

***Please answer Question 1 AND Question 2 to receive positive raising. *** Please answer ALL.

Question 1

Question Help * P 8-31 (similar to) You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease the equipment to you for $10,500 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 1 -$2,200 Year 2 Year 3 $2,200 Year 4 Year 5 Year 0 2,200 2,200 2,200 0.700

Question 2

Answer 1

Answer:

Question 1)

Given

Leasing cost per year L=$10500

interest rate r=6.7%

n=5 years

PV of leasing agreement =- L*(1-(1+r)^-n)/r=10500*(1-(1+6.7%)^-5)/6.7%=$43400.11 Eq 1

PV of if we buy equipment

PV =CF/(1+r)^t

where CF =cash flow

r=6.7%

t=Year in which cash flow occur

Year	Cashflow	PV of Cash flow
0	40700	40700.00
1	2200	2061.86
2	2200	1932.39
3	2200	1811.05
4	2200	1697.32
5	2200	1590.75
Total		49793.36

PV of if buy machine = Sum of PV of cash flow=$49793.36 Eq 2

From Equation 1 and 2 cost of leasing is we find that cost of leasing is lower than cost of buying so we will lease out the machine.