Foster Inc. Is trying to declde whether to lease or purchase a piece of equipmen

Question

Foster Inc. Is trying to declde whether to lease or purchase a piece of equipment needed for the next ten years. The equipment would cost $45,000 to purchase, and maintenance costs would be $5,400 per year After ten years, Foster estimates It could sell the equipment for $26,000. If Foster leases the equipment, It would pay $16,000 each year, which would Include all maintenance costs. Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1) If the hurdle rate for Foster is 11%, Foster should (Round your PV factors to 4 decimal places. Do not round intermediate calculations. Round your final answer to the nearest hundred.) O buy the equipment, as net present value of cost is about $26600 less. O buy the equipment, as net present value of cost is about $45.000 less O lease the equipment, as net present value of cost is about $22.900 less lease the equipment, as net present value of cost is about $26.600 less.

Explanation / Answer

Purchase Year 0 Year 1-10 Year 10 Initial investment -45000 Maintenance cost -5400 Salvage value 26000 Net cost -45000 -5400 26000 Present value $1 i = 11% N = 10 years 1 5.88923 0.35218 Net present value -45000 -31802 9157 Net present value total -67645 Lease Year 1-10 Initial investment Maintenance cost -16000 Salvage value Net cost -16000 Present value $1 i = 11% N = 10 years 5.88923 Net present value -94228 Net present value total -94228 Buy the equipment as NPV is about 26600 less 26583 Correct answer is A

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