A common use of CBA is to decide on whether it is better to buy a piece of equip

Question

A common use of CBA is to decide on whether it is better to buy a piece of equipment for a project or lease it for the limited life-time of the project. Consider equipment which has a purchase price of $100,000, and fixed maintenance costs of $1000 p.a. for the 3 years of a project. Operating costs are $80 per hour, and it is expected that it will be used for 4500 hours over the 3 years of the project. At the end of the project, it is anticipated that it can be sold for $20,000. Alternatively, it can be leased for $600 per day (including all maintenance and operating costs). It is anticipated that it will be needed for 250 days per year. If the cost of finance is 10% p.a., which of the two options should be chosen? What other factors should be considered before coming to a final decision?

If the answer is as followed, how was " i " calculated? - and how do I tie ' the cost of finance is 10% p.a' into the question?

Explanation / Answer

You are not suppose to calculate "i" , it is given in question himtself. When we say cost of finance is 10% , it means cost of borrowing money in the market is 10%( i.e 'i' is 10%).

So for discounting , i.e calculating present value, we use this 'i' or cost of finance as 10% or i = 0.10.

If you don't understand then comment , I'ill explain in more details.

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