Baker Company needs to decide whether to buy or lease office equipment. Baker ca

Question

Baker Company needs to decide whether to buy or lease office equipment. Baker can buy the office equipment for $250,000 today, which would require that they borrow the funds from the bank. The bank will charge them 8% and require equal monthly payments over 4years. If they choose to lease for 3 years, they will have to put $10,000 down today and make monthly lease payments of $7,500 and they can purchase the office equipment after the last payment for $5,000. If they opt for the 5-year lease, they need to put $6,000 down today and make monthly payments of $5,000 and they can purchase the office equipment after the last payment for $3,000. Which option is best? Explain with numerical analysis.

Explanation / Answer

Baker Company All Amounts in $ In case the bank funds the amount Loan Amount 250000 Interest @ 8% for 4 years 80000 Total Amount Due 330000 In case the 3 year lease is accepted Initial Amount paid 10000 Monthly Lease Payments for 36 months 270000 Last Payment 5000 Total Amount Due 285000 In case the 5 year lease is accepted Initial Amount paid 6000 Monthly Lease Payments for 60 months 300000 Last Payment 3000 Total Amount Due 309000 By the least cost analysis concept, the 3 year lease should be accepted by Baker Company.

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.