26) Colorful Candies Corporation needs to acquire the use of a machine to be use

Question

26) Colorful Candies Corporation needs to acquire the use of a machine to be used in its manufacturing process. The machine needed is manufactured by Madewell Machinery. The machine can be used for 9 years and then sold for S18,000 at the end of its useful life. Madewell has presented Colorful Candies with the following options 1. Buy machine. The machine could be purchased for $168,000 in cash. All maintenance and insurance costs, which approximate $13,000 per year, would be paid by Colorful Candies. 2. Lease machine. The machine could be leased for a 9-year period for an annual lease payment of $33,000 with the first payment due immediately. All maintenance and insurance costs will be paid for by Madewell Machinery and the machine will revert back to Madewell at the end of the 9-year period. Required: (16 points) Assuming that a 9% interest rate properly reflects the time value of money in this situation and that all maintenance and insurance costs are paid at the end of each year, find the present value of a) The Buy Option b) The Lease Option c) Which option should Colorful Candy choose? Why?

Explanation / Answer

26 (a) Net Present Value under Buy Option

26 (b). Calculation of Net Present Value under Lease Option

26(c) Colorful Candy should lease the machine as the present value of outflow is lower under that option.

Year Outflow PVF at 9% Present Value 0 168000 -       168,000.00 1 13,000 0.9174 11,926.61 2 13,000 0.8417 10,941.84 3 13,000 0.7722 10,038.39 4 13,000 0.7084 9,209.53 5 13,000 0.6499 8,449.11 6 13,000 0.5963 7,751.48 7 13,000 0.5470 7,111.45 8 13,000 0.5019           6,524.26 9 13,000 0.4604 5,985.56 9 -18,000 0.4604         (8,287.70) Present Value of Cash Outflow       237,650.51

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.