7-74: A contractor is considering whether to buy or lease a new machine for her

Question

7-74: A contractor is considering whether to buy or lease a new machine for her layout site work. Buying a new machine will cost $12,000 with a salvage value of $1200 after the machine's useful life of 8 years. On the other hand, leasing requires an annual lease payment of $3000. Assuming that the MARR is 15% and on the basis of an internal rate of return analysis, which alternative should the contractor be advised to accept? The cash flows are as follows:

Year (n) Alt. A (buy) Alt. B (lease)
0 -$12,000 -$3000
1 -$3000
2 -$3000
3 -$3000
4 -$3000
5 -$3000
6 -$3000
7 -$3000
8 +$1,200 $0

Explanation / Answer

NPV of cost of new machine =-$12,000 +$1,200/1.15^8 =-$11,607.71787 NPV of leasing cost =-$3000 +-$3000/1.15 +-$3000/1.15^2 ....-$3000/1.15^7 =-$15,481.26 NPV of cost of new machine is less. hence contractor should consider buying new machine

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