Problem 13-22 Net Present Value Analysis of a Lease or Buy Decision [LO1] Blinko

Question

Problem 13-22 Net Present Value Analysis of a Lease or Buy Decision [LO1]

Blinko Products wants an airplane for use by its corporate staff. The airplane that the company wishes to acquire, a Zephyr II, can be either purchased or leased from the manufacturer. The company has made the following evaluation of the two alternatives

Purchase alternative. If the Zephyr II is purchased, then the costs incurred by the company would be as follows:

Blinko Products wants an airplane for use by its corporate staff. The airplane that the company wishes to acquire, a Zephyr II, can be either purchased or leased from the manufacturer. The company has made the following evaluation of the two alternatives

Explanation / Answer

Solution :

To Calculate the Present value of the Purchase Alternative Year Cash flows Discount rate 5% Present value of cash flows 0 ($720,000) 1 ($9,000) 0.952 ($8,568) 2 ($9,000) 0.907 ($8,163) 3 ($9,000) 0.864 ($7,776) 4 ($9,000) 0.823 ($7,407) 5 ($9,000) 0.784 ($7,056) 6 ($9,000) 0.746 ($6,714) 7 ($9,000) 0.711 ($6,399) 8 ($9,000) 0.677 ($6,093) 9 ($11,000) 0.645 ($7,095) 10 $343,000 0.614 $210,602 $145,331 To Calculate the Present value of the Lease Alternative Year cash flows Discount rate 5% Present value of cash flows 0 ($10,000) 1 ($51,000) 0.952 ($48,552) 2 ($51,000) 0.907 ($46,257) 3 ($51,000) 0.864 ($44,064) 4 ($51,000) 0.823 ($41,973) 5 ($51,000) 0.784 ($39,984) 6 ($51,000) 0.746 ($38,046) 7 ($51,000) 0.711 ($36,261) 8 ($51,000) 0.677 ($34,527) 9 ($49,000) 0.645 ($31,605) 10 -$33,000.00 0.614 ($20,262) ($381,531)

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