Question 1 5 points Save Answer Precision Manufacturing is considering the purch

Question

Question 1 5 points Save Answer Precision Manufacturing is considering the purchase of a machine for $500,000. Altermatively, he machine could be leased on a five-year contract for $125.000 per year. Payments will be made at the beginning of each year If the company purchases the machine, maintenance costs will be $25,000 per year. The salvage value of the machine in five years' time is expected to be $70,000 Which alternative should be recommended based on the present worth method? Use MARR of 10% Present Worth of Buying Decision Present Worth of Lease Decision Present worth of salvage value Decision: Buy or Lease? A Lease 64343 C 521250 D- 551312 E. Buy -500,000 G 43,463 Moing to anoter queston wil save his respons. Question 1 of 12

Explanation / Answer

Ans:

Present Worth = A * (1/(1+r)^n)

present worth of Buying Decision = -551312

present worth of Leasing Decision = -521250

present worth of Salvage Decision = 43463

Decision : Since the cost is lower in case of leasing, Machine should be leased.

1) Computation of present worth of Buying Decision

Present Worth = - $500,000 * (1/(1+0.10)^0) + (-$25000) * sum of DF for year 1 to year 5 +$70,000 * (1/(1+0.10)^5)

= -$500,000 * 1 - $25000 * 3.791 + $70,000 * 0.6212

= -$500,000 - $94775 + $43470

= -$551305 (Approx)

2) Computation of present worth of Leasing Decision

Present Worth = -$125000* (1/(1+0.10)^0) + (-$125000) * sum of DF for year 1 to year 4

= -$125000 * 1 - $125000 * 3.170

= -$125000 - $396250

= -$521250

3) Present worth of salvage value = $70,000 * (1/(1+0.10)^5)

= $70,000 * 0.621

= $43470 (Approx)

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