I really need help with 7-71, please put steps and final answer so I can check m

ID: 1194200 • Letter: I

Question

I really need help with 7-71, please put steps and final answer so I can check myself Oliver Hedgepélh, Amernea Contributed by University 7-70 A contractor is considering whether to buy or lease A a new machine for her layout site work. Buying a new machine will cost $12,000 with a salvage value of $1200 after the machine's useful life of 8 years. On the other hand, leasing requires an annual lease payment of $3000, which occurs at the start of each year. The MARR is 15%. On the basis of an internal rate of return analysis, which alternative should the contractor be advised to accept? 7-71 A bulldozer can be purchased for $380,000 and used for 6 years, when its salvage value is 15% of the first cost. Alternatively, it can be leased for $60,000 a year. (Remember that lease payments occur at the start of the year.) The firm's interest rate is 12%. (a) What is the interest rate for buying versus leasing? Which is the better choice? (b) If the firm will receive $65,000 more each year than it spends on operating and maintenance costs, should the firm obtain the bulldozer? What is the rate of return for the bulldozer using the best financing plan? 72 A diesel generator for electrical power can be pur- chased by a remote community for $480,000 and used for 10 enr uhon it

Explanation / Answer

Here-

Present value (With Buying Option)

-12000 +1200(P/F,15%,8) = $(-11608 )

Present value (With Leasing Option)-

PV= -3000*(P/A,15%,8) = $(-13461)

So comparing the PV's we will take the PV with Less Negative value so Buying is better option on the basis of MARR.

(Use Interest table to get the values of P/F, P/A etc I have shared the link below - (http://global.oup.com/us/companion.websites/9780199778126/pdf/Appendix_C_CITables.pdf)

Buying Leasing Initial cost $ -12000 annual cost $ -3000 Salvage value 1200 Life Years 8 8 MARR % 15 15