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 Year 3 Year 4 Year 5 Net Cash Flow (48,750) 2,500 2,500 2,500 2,500 5,000 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 Year 3 Year 4 Year 5 19 Net Cash Flow (8,250) (8,250) (8,250) (8,250) (8,250) —- 20 Present-value factor 21 Present-value answers 5 22 Present-value cost of leasing 5

Explanation / Answer

(1) Interest rate = 10%

Since NPV (Net Present Value) of cost of leasing is lower, Leasing is preferred.

(2) Interest rate = 6%

Since NPV of cost of leasing is lower, leasing is preferred. The decision doesn't change.

OWNING Year Cash Flow ($) PV Factor $10% Discounted Cash Flow ($) (A) (B) (A) x (B) 0 -48,750 1.0000 -48,750 1 2,500 0.9091 2,273 2 2,500 0.8264 2,066 3 2,500 0.7513 1,878 4 2,500 0.6830 1,708 5 5,000 0.6209 3,105 NPV ($) = -37,721 LEASING Year Cash Flow ($) PV Factor $10% Discounted Cash Flow ($) (A) (B) (A) x (B) 0 1.0000 0 1 -8,250 0.9091 -7,500 2 -8,250 0.8264 -6,818 3 -8,250 0.7513 -6,198 4 -8,250 0.6830 -5,635 5 -8,250 0.6209 -5,123 NPV ($) = -31,274

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