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Sir I don’t understand how they get C. (NB: 10yr Ann Factor is 6.145, 5yr Ann factor 3.791)
A company is considering whether to buy or lease two assets.
Asset 1 has a 10 year economic life with a zero residual value. It can be purchased for $80,000 payable immediately. Alternatively, it can be leased for 10 lease rentals of $12,000 per annum payable in advance.
Asset 2 has a 5 year economic life. It can be purchased for $81,000 payable immediately and will have a residual value of $40,000 after 5 years. Alternatively, it can be leased for 5 lease rentals of $14,000 per annum payable annually in arrears and the asset will be handed back to the lessor at the end of this 5 year contract.
The required rate of return is 10% per annum. Ignore taxation.How should the company finance each asset?
A. Lease-A1, A2
B. Lease A1. Buy A2
C .Buy A1, Lease A2
D. Buy A1. A2For asset 1, the PV of the lease flows is 12,000 x (1 + 5.759) = $81,108. Therefore it is cheaper to buy.
For asset 2, the PV of the lease flows is 14,000 x 3.791 = $53,074.
The PV of the buy flows is (40,000 x 0.621) – 81,000 = $56,160. Therefore it is cheaper to lease.Have you watched my free lectures on lease and buy?
Understood. I have watched all the lectures and gone through the course notes. Thank you so much Sir !
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