Randall Corp.is trying to decide whether to lease or purchase a piece of equipment needed for the next five years.The equipment would cost $100,000 to purchase,and maintenance costs would be $10,000 per year.After five years,Randall estimates it could sell the equipment for $30,000.If Randall leases the equipment,it would pay $30,000 each year,which would include all maintenance costs.If the hurdle rate for Randall is 12%,Randall 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 it's better to buy or lease the equipment, we need to calculate the net present value (NPV) of both options and compare them.

Buying the equipment:
Initial cost: -$100,000
Maintenance costs: -$10,000 per year, for 5 years
Salvage value: +$30,000
Discount rate: 12%

Using the PV factor for a lump sum payment of $100,000 for 5 periods at 12%, we get a present value (PV) of $49,655. Using the PV factor for an annuity payment of $10,000 for 5 periods at 12%, we get a PV of $36,783. The salvage value doesn't need to be discounted since it's at the end of the 5th year. Therefore, the NPV of buying the equipment is:

-$49,655 - $36,783 + $30,000 = -$56,438

Leasing the equipment:
Lease cost: -$30,000 per year, for 5 years
Discount rate: 12%

Using the PV factor for an annuity payment of $30,000 for 5 periods at 12%, we get a PV of $118,058. Therefore, the NPV of leasing the equipment is:

-$118,058 = -$118,058

Comparing the two options, the NPV of leasing is higher than the NPV of buying, so it's better to lease the equipment. The net present value of cost is about $11,000 less for leasing compared to buying.