merson Corp is trying to decide whether to lease or purchase a piece of equipmen
ID: 2527331 • Letter: M
Question
merson Corp is trying to decide whether to lease or purchase a piece of equipment needed far the next five years The equipement weuld cost $506000 urchasre, and maintenarice rnsts would be $20,000 per yar After five years, Enerson estirmates it culd sell the cquipment for $101.300. If Emerson Icascs the cqupment it would pay $151,000 cach yCar, which would includc al maintenance costs Emerson's nurdle rate is 13? ? five yrs hich w Annuity of S1.) Use appropriate factor from the PV tables.) a. VWhat is the net present value cf the cost of purchasing the equipment? (Round your final answer to the nearest dollar amount.) 5 506,000 b. What is the net present valuc of the cost of leasing the cquipment? Round your final answer to the nearest dollar amount c. Based on financial factors, should Emerson purchase or lease the equipment? O Lease PurchaseExplanation / Answer
a)
Present value of cost of purchasing equipment:
Cost of Equipment = 506000
Maintenance cost = 20000 per year for 5 years
Sale value of equipment after five years = 101300
Hurdle rate = 13%
Present value of cost of purchasing equipment = Cost of Equipment + Present value of maintenance cost - Present value of sale value of equipment after five years
Present value of maintenance cost = 20000*Present value annuity factor(13%,5)
= 20000*3.5172 = 70344
Present value of sale value of equipment after five years = 101300*Present value interest factor(13%,5)
= 101300*0.5427 = 54975.51
Present value of cost of purchasing equipment = 506000 + 70344 - 54975.51 = 521368.49
Net present value of cost of purchasing equipment = $521369
b)
Lease rent each year = 151000
Present value of lease rent = 151000*Present value annuity factor(13%,5)
= 151000*3.5172 = 531097.2
Net present value of the cost of leasing the equipment = $531097
c)
Purchase
Emerson should purchase the equipment as the net present value of the cost of purchase is lower in comparison to cost of leasing.
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