Using the appropriate table from the Chapter 12 Appendices, record the present-v

Question

Using the appropriate table from the Chapter 12 Appendices, record the present-value factor at 10% for each year and compute the present-value cost of owning and the present value of leasing. Which alternative is more desirable at this interest rate? Do you think your answer would change if the interest rate was 6% instead of 10%? Cost of Owning: Anywhere Clinic—Comparative Present Value For-Profit Cost of Owning: Year 0 Year 1 Year 2 Net Cash Flow (48,750) 2,500 2,500 Present-value factor Present-value answers 5 Present-value cost of owning 5 Cost of Leasing: Anywhere Clinic—Comparative Present Value Line For-Profit Cost # of Leasing: Year 0 Year 1 Year 2 19 Net Cash Flow (8,250) (8,250) (8,250) 20 Present-value factor 21 Present-value answers 5 22 Present-value cost of leasing 5

Explanation / Answer

a) The lease opportunity is more desirable at 10% as the PV of the cash outflows is lower at $22568.

Calculations:

b) With 6% interest there is no change in the decision as the PV of cash outflows of leasing is lower @ $23,375

Workings:

With discount rate of 10%: present Owning year cash flow pvif @ 10% value 0 -48750 1.0000 -48750 1 2500 0.9091 2273 2 2500 0.8264 2066 -44411 Leasing: present year cash flow pvif @ 10% value 0 -8250 1.0000 -8250 1 -8250 0.9091 -7500 2 -8250 0.8264 -6818 -22568

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