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Determine, on a present worth basis, whether it is more economical to lease or purchase a...

Determine, on a present worth basis, whether it is more economical to lease or purchase a machine. The first cost of purchasing the machine is $100000, an expected life of 6 years, annual operating and maintenance cost of $7000 and a salvage value of $13000. The machine can be leased for $25000 annually. Operating expenses are expected to be $800. Use an interest rate of 12%

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Answer #1

R = 12%

n = 6 years

When machine is purchased:

Present value of the cost = first cost + present value of the O&M cost – present value of the salvage value

Present value of the cost = 100000 + 7000*(1-1/1.12^6)/.12 – 13000/1.12^6

Present value of the cost = $122193.6 (It is negative as it is cost)

When machine is taken on lease:

Present value of the cost = 25000*(1-1/1.12^6)/.12 + 800*(1-1/1.12^6)/.12

Present value of the cost = $106074.3 (It is negative as it is cost)

Since present value of the cost during leasing is most economical and lower than the present value of the cost when it is purchased, then leasing is the best option on present worth basis.

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