Foster Inc.is trying to decide 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 $5,000 per year.After ten years,Foster estimates it could sell the equipment for $20,000.If Foster leases the equipment,it would pay $12,000 each year,which would include all maintenance costs.If the hurdle rate for Foster is 10%,Foster should: (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. )(Use appropriate factor from the PV tables.Do not round intermediate calculations.Round your final answer to the nearest hundred. )

Question

Quizplus · Accepted Answer

To determine whether to lease or buy, we calculate the Net Present Value (NPV) of both options. For purchasing, the initial cost is $45,000, with annual maintenance of $5,000 for 10 years, and a salvage value of $20,000. For leasing, the cost is $12,000 annually for 10 years. Using a 10% discount rate, the NPV of purchasing (including maintenance costs and salvage value) and leasing are calculated. The option with the lower NPV is more cost-effective. In this case, buying the equipment has a lower NPV by about $5,700 compared to leasing, making it the better financial decision.