A company needs a new car and has the following options: (1) purchase the car cash or (2) lease the car. They are expecting to use the car for 3 years.

If car is purchased for cash:

â¢ Cost new, $30,000

â¢ Salvage value, $15,000

Costs for 3 year lease:

â¢ Amount due at signing, $3000

â¢ 36 monthly lease payments of $400. The monthly payments are made at the beginning of the month (i.e. starting when n = 0)

The company usually invests and borrows at 12% per year compounded monthly. Determine the equivalent monthly cost of each alternative. Note: the monthly beginning of the month lease payments need to be converted to end of the month equivalent payments (i.e. payments from n = 1 â 36). Which option is best?

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punithg05Lv10

27 May 2023

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Jarrod RobelLv2

4 Jan 2018

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Proust Manufacturing Co. produces personal fitness machines. The once successful line is no longer selling well, so the company is considering production of a new improved cardio-vascular machine. This can be done by buying needed production equipment. There is a six-month manufacturing, delivery, setup, and training delay before the equipment will be ready for production. The company wants to start producing the new cardio machine in January next year. Two options are available â lease or buy. Buy Option â The entire purchase price of the production equipment is $650K and is due at the time of the order. The cost of capital for this purchase is 6%. Assume: (1) the equipment has no residual value at the end of the fifth year and (2) there are no taxes. Lease Option â The total lease cost is $550K. A $25K deposit is due at the time of the order. The remaining portion of the first yearâs lease payment ($85K) is due in January next year. The other four annual lease payments ($110K each) are due in January of production years 2, 3, 4, and 5. The cost of capital for leasing is 12%. Assume no taxes. Revenue from sales of the new cardiovascular machines is expected to be:

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â¢ Year 2 â $350,000

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14. You used the Excel NPV function to calculate NPV and you got the following values: Buy â $363,562; Lease - $464,317. What did you do wrong?

15. Calculate IRR for each option.

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(credit) Land $25,000

(credit) Gain on Sale of Land $15,000

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