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Damage Ltd will be replacing some machines in the next year and needs to decide whether
to purchase or lease the machines. The company uses 10% as its cost of capital and has the
following information:
? Purchase price of $600,000.
? Annual running costs of $45,000 for the next five years, paid annually in arrears.
? A residual value of $220,000 at the end of the five years.
The machine could be leased for five years based upon total annual costs of $135,000 paid
annually in advance.
(a) What is the NPV of purchasing the machine?
(b) What is the NPV of leasing the machine?sir in this question (a) I got the answer (618451) using arrears..
however in the answer it is given (633975) and it has ignored arrears.so i desperately need your help here
(b)this one Is fine because i got the answer of NPV (562950) using advance…
The answer is (633,975) and it doesn’t ignore arrears.
The flows are:
0. (600,000) (600,000)
1 – 5 (45,000) p.a. x 3.791. (170,595)
5. 220,000 0.621. 136,620(633,975)
Where did you find this question (because lease and buy is really a Paper FM topic)?
I got this question from mock question published by Kaplan
But
Here (600000) was in year 0.
But question has said that 45000 annual cost paid in arrears.So I thought it would be paying 45000 annually from year 2 to year 6
Need help here John
No. The first payment will be at the end of the first year which is one year later than the date at which the initial cost is paid.
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