1.Buy machine. The machine could be purchased for $169,000 in cash. All maintena
ID: 2397114 • Letter: 1
Question
1.Buy machine. The machine could be purchased for $169,000 in cash. All maintenance and insurance costs, which approximate $14,000 per year, would be paid by Kiddy. 2.Lease machine. The machine could be leased for a 10-year period for an annual lease payment of $34,000 with the first payment due immediately. All maintenance and insurance costs will be paid for by the Lollie Corp. and the machine will revert back to Lollie at the end of the 10-year period. Required Assuming that a 8% interest rate properly reflects the time value of money in this situation and that all maintenance and insurance costs are paid at the end of each year, find the present value for the following options. Ignore income tax considerations. Determine which option Kiddy should choose. (Negative amounts should be indicated by a minus sign. Round your final answers to nearest whole dollar amount.) PV Buy option Lease option Kiddy should choose LeaseExplanation / Answer
Calculation of Net Present value of Outflows
Buy Option
Year
Outflow
Present value factor at 8% discount rate
Discounted Outflow
0
$ 169,000.00
1
$ 169,000.00
1-10
$ 14,000.00
6.71008
$ 93,941.14
Present value of Total Outflows
$ 262,941.14
Calculation of Net Present value of Outflows
Lease Option
Year
Outflow
Present value factor at 8% discount rate
Discounted Outflow
0
$ 34,000.00
1
$ 34,000.00
1-9
$ 34,000.00
6.24689
$ 212,394.19
Present value of Total Outflows
$ 246,394.19
Notes
1. First Installment is paid in Year 0 and will not be discounted.
2. Total 9 installments will be paid after first installment.
3. Since installments are paid in beginning of the year, discounting will start from 2nd installment with discounting factor of year 1.
4. It is assumed that when Machine is purchased then also the life of machine is 10 years with no salvage value.
5. Maintenance and insurance in case of lease option are paid by lessor so it shall not be included for calculating cash outflows.
6. Lease option has lowest NPV an should be accepted.
PV
Buy Option
$ 262,941.14
Lease Option
$ 246,394.19
Kiddy Should chose
Lease Option
Calculation of Net Present value of Outflows
Buy Option
Year
Outflow
Present value factor at 8% discount rate
Discounted Outflow
0
$ 169,000.00
1
$ 169,000.00
1-10
$ 14,000.00
6.71008
$ 93,941.14
Present value of Total Outflows
$ 262,941.14
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