PROBLEM FIVE The farm manager for OC would like to purchase a new machine with a
ID: 2486536 • Letter: P
Question
PROBLEM FIVE
The farm manager for OC would like to purchase a new machine with a useful life of three years. He is unsure whether to purchase or lease the machine. The following table outlines the expected net cash flows if the machine is purchased or leased. Assume OC has a required rate of return of 7%.
Year
Purchase
Lease
0
($42,100)
($15,000)
1
$16,000
$8,800
2
$17,000
$8,800
3
$16,500
$8,800
Total
$7,400
$11,400
What is the net present value of the lease option?
$8,093.84
$11,510.56
$16,790.99
None of the above.
2 points
Question 18
PROBLEM FIVE
The farm manager for OC would like to purchase a new machine with a useful life of three years. He is unsure whether to purchase or lease the machine. The following table outlines the expected net cash flows if the machine is purchased or leased. Assume OC has a required rate of return of 7%.
Year
Purchase
Lease
0
($42,100)
($15,000)
1
$16,000
$8,800
2
$17,000
$8,800
3
$16,500
$8,800
Total
$7,400
$11,400
What is the net present value of the purchase option?
a.
$1,170.64
b.
$6,816.07
c.
$9,540.34
d.
None of the above.
2 points
Question 19
PROBLEM FIVE
The farm manager for OC would like to purchase a new machine with a useful life of three years. He is unsure whether to purchase or lease the machine. The following table outlines the expected net cash flows if the machine is purchased or leased. Assume OC has a required rate of return of 7%.
Year
Purchase
Lease
0
($42,100)
($15,000)
1
$16,000
$8,800
2
$17,000
$8,800
3
$16,500
$8,800
Total
$7,400
$11,400
Should the company lease or purchase a new machine?
Lease
Purchase
Not enought information
None of the above
Explanation / Answer
Net present value = sum of all present values. Present value = cash flow/(1+r)^n, where r = 7% and n is the year in which the cash flow occurs.
NPV of the lease option:
NPV of the purchase option:
As the NPV of the lease option is higher, the lease option should be selected. Thus the company should lease the new machine.
Year Cash flow 1+r PV 0 -15,000.00 1.07 -15,000.00 1 8,800.00 8,224.30 2 8,800.00 7,686.26 3 8,800.00 7,183.28 NPV 8,093.84Related Questions
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