A machine can be leased for five years at $3000 per month, payable in advance. Alternatively, it can be purchased for $150,000, and sold for $20,000 in five years. Should the machine be purchased or leased if the firm's cost of borrowing is 10%? Why?

Question

Quizplus · Accepted Answer

To determine the better option, calculate the present value (PV) of both options. For leasing, the PV of payments is an annuity: PV = Pmt * [(1 - (1 + r)^-n) / r], where Pmt = $3000, r = 10%/12 (monthly rate), and n = 5*12 (months). For purchasing, the PV = $150,000 - PV of $20,000 received in 5 years. The PV of $20,000 is calculated using the formula PV = FV / (1 + r)^n, where FV = $20,000, r = 10% (annual rate), and n = 5. Comparing these PVs shows purchasing has a lower PV, making it the better option financially.

A Machine Can Be Leased for Five Years at $3000