Suppose that your company is trying to decide whether it should buy special equi

Question

Suppose that your company is trying to decide whether it should buy special equipment to prepare high-quality publications itself or lease the equipment from another company. Leasing the equipment costs $240 per day. Purchasing the equipment requires an initial investment of $6,800 and a daily operating cost of $70. After how many days will the lease cost be the same as the purchase cost for the equipment? Assume that your company would only use the equipment for 30 days. Should the company buy or lease?

Explanation / Answer

Let x be the number of days after which the least cost will be same as the purchase cost.

For x days, the lease cost is (240*x)

For x days, the purchase cost is (6800 + 70*x), since it is the sum of initial investment and daily operation cost

Hence, after x days,

240*x = 6800 + 70*x

=> 170x = 6800

x = 40

Therefore, the lease cost will be the same as the purchase cost after 40 days

Should the company buy or lease if the equipment is needed only for 30 days

For 30 days,

Purchase cost = (6800 + (70*30)) = 6800 + 2100 = $8900

Lease cost = 240*30 = $7200

Hence, it seems like lease cost > purchase cost. But, before taking the decision we will also need to consider the scrap value of the equipment, if it has a resale value after 30 days.

Therefore,

If Purchase Cost - Scrap Value < Lease Cost, the company should buy the equipment

Otherwise, the company should lease the equipment

Various scenarios:

(i) After 30 days, the equipment doesnt have any scrap value:

In such case, leasing is a better option than purchasing the equipment

(ii) After 30 days, the equipment has a scrap value which is greater than $1700:

In this case, Purchase Cost - Scrap Value < Lease Cost. So, purchasing the equipment is a better option

(iii) After 30 days, the equipment has a scrap value which is lesser than $1700:

In this case, Purchase Cost - Scrap Value > Lease Cost. So, leasing the equipment is a better option

(iv) After 30 days, the equipment has a scrap value of exactly $1700:

Both the options involve the same cost. So, the company can go with either of the options, unless no other risk factor is involved.

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