Resources - Present Value Factors Present value of $1 at 7% for 1 period Present

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Resources - Present Value Factors Present value of $1 at 7% for 1 period Present value of $1 at 7% for 2 period Present value of $1 at 7% for 3 period Present value of $1 at 7% for 4 period Present value of $1 at 7% for 5 period Present value of an annuity of $1 at 7% for 1 period Present value of an annuity of $1 at 7% for 2 period Present value of an annuity of $1 at 7% for 3 period Present value of an annuity of $1 at 7% for 4 period Present value of an annuity of $1 at 7% for 5 period 0.935 0.857 0.816 0.763 0.713 0.935 1.802 2.622 3.387 4.100

Explanation / Answer

Cost of the machine =$750,000

Option-1: Leasing

Amount to be paid each year at beginning =$155,000

Present Value of Net Cash Outflow =$-155,000 - 155,000x3.387 =$-695,485

Option-2: Purchase

Loan Amount =$750,000

Interest Rate =7%

Annual Installment to the bank against loan amount =PMT(0.07,5,750000) =$182,918

Present Value of Net Cash Outflow =$-182,918x4.1000 + 75,000x0.713 =$-749,963.80 + 53,475 =$-696,488.8

Since, the Cash Outflows are lower in Leasing, it should be the preferred option.

The options in the dropdown for advantages are not visible and hence it is not possible to answer.

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