Blinko Products wants an airplane for use by its corporate staff. The airplane t
ID: 2458917 • Letter: B
Question
Blinko Products wants an airplane for use by its corporate staff. The airplane that the company wishes to acquire, a Zephyr II, can be either purchased or leased from the manufacturer. The company has made the following evaluation of the two alternatives:
Purchase alternative. If the Zephyr II is purchased, then the costs incurred by the company would be as follows:
The plane would be sold after five years. Based on current resale values, the company would be able to sell it for about one-half of its original cost at the end of the five-year period.
Lease alternative. If the Zephyr II is leased, then the company would have to make an immediate deposit of $60,000 to cover any damage during use. The lease would run for five years, at the end of which time the deposit would be refunded. The lease would require an annual rental payment of $188,000 (the first payment is due at the end of Year 1). As part of this lease cost, the manufacturer would provide all servicing and repairs, license the plane, and pay all taxes. At the end of the five-year period, the plane would revert to the manufacturer, as owner.
You must use spreadsheet functions or a financial calculator to solve these questions.
Use the total-cost approach to determine the present value of the cash flows associated with purchase alternative. (Outflows should be indicated with a minus sign. Round answers to the nearest dollar amount.)
Use the total-cost approach to determine the present value of the cash flows associated with lease alternative. (Outflows should be indicated with a minus sign. Round final answers to the nearest dollar amount.)
Blinko Products wants an airplane for use by its corporate staff. The airplane that the company wishes to acquire, a Zephyr II, can be either purchased or leased from the manufacturer. The company has made the following evaluation of the two alternatives:
Explanation / Answer
1a. cost of buying
cost of purchase 703086
1b. COST OF LEASE
2. since cost of lease is less we should opt leasing option.
year 0 1 2 3 4 5 purchase 850000 - - - - - annual cost 7000 7000 7000 7000 7000 repair 8000 8000 8000 10000 20000 sell of plane 425000 Total -850000 -15000 -15000 -15000 -17000 398000 PV @ !6% 0.826 0.743 0.641 0.552 0.476 out flow -850000 -12390 -11145 -9615 -9384 189448 net out flow -892534 + 189448