Old School is trying to decide whether it should purchase or lease a new high-speed photocopier machine. It will cost the school $14,000 to purchase the copier and $750 each year to maintain the machine over the course of its 6-year useful life. At the end of the sixth year, Old School expects to be able to sell the copier for $1,000. A dealer has offered to lease the school the same copier for a payment of $750 at the beginning of the lease plus lease payments of $3,450 per year for 4 years. Lease payments include all maintenance. The dealer was unable to offer a lease longer than 4 years. Lease payments would be made at the end of each year. If Old School’s discount rate is 8 percent, which alternative should it choose and why?

Old School is trying to decide whether it should purchase or lease a new high-speed photocopier machine. It will cost the school $14,000 to purchase the copier and $750 each year to maintain the machine over the course of its 6-year useful life. At the end of the sixth year, Old School expects to be able to sell the copier for $1,000. A dealer has offered to lease the school the same copier for a payment of $750 at the beginning of the lease plus lease payments of $3,450 per year for 4 years. Lease payments include all maintenance. The dealer was unable to offer a lease longer than 4 years. Lease payments would be made at the end of each year. If Old School’s discount rate is 8 percent, which alternative should it choose and why?

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter10: Project Cash Flows And Risk

Section: Chapter Questions

Problem 4PROB

See similar textbooks

Similar questions

Cullumber, Inc. is considering the purchase of a warehouse directly across the street from its manufacturing plant. Cullumber currently warehouses its inventory in a public warehouse across town. Rent on the warehouse and delivering and picking up inventory cost Cullumber $50880 per year. The building will cost Cullumber $477000. Cullumber will depreciate the building for 20 years. At the end of 20 years, the building will have a $132500 salvage value. Cullumber's required rate of return is 12%. Click here to view the factor table. Using the present value tables, the building's net present value is (round to the nearest dollar) O $1017600. O $46077. O $393783. O $-83217.
A crane was recently purchased by a local construction company to assist with the construction of some new apartments. The crane company offers a protection plan that will pay for all the maintenance and repairs for the first five years. The company plans on using the crane for 11 years. The repair costs are expected to average $24,000 per year at the 6th year and 7th years, $30,000 per year in the 8th and 9th years, and $36,000 per year in the 10th and 11th years. Despite the uneven maintenance costs, the company plans on using financing to instead pay a uniform amount of money each year to cover all maintenance over the 11 year life span. Assuming an interest rate of 5%, answer the following questions: • Draw the cash flow diagram to illustrate the repair costs. How much money will the company spend each year to cover all of the maintenance costs over the 11 year period?
A college plans to build a new dormitory building. A group of alumni volunteered to donate enough funds to cover all the maintenance cost of the dormitory. As an analyst working for the college, you are asked to determine the amount of the donation. You are told that the maintenance cost of the dormitory will be $35,000 per year for the first 20 years. Then it will increase to $45,000 per year for years 21 through 30, and to $60,000 per year after that. The dormitory is assumed to have an indenite service life. The college will place the funds on an account that will pay 12% interest compounded annually. How large should the donation be? A) $500,000 B) $304,478 C) $347,231 D) Answers A, B and C are not correct
After seeing its neighboring village obtain a new water tower, the city board of East Dubuque begins planning to replace its water towers. The board estimates that it will need $1,750,000 to build the new water towers in 20 years. At this time, the city board plans to assess its 2753 homeowners with a one-time flat fee surcharge and the n invest the money received in a CD paying 9% interest compounded daily(use n=360) for 20 years. a.) How much money will the board need to raise at this time to meet the city’s water tower needs at the end of 20 years? b.) Before applying the surcharge, the city board receives a federal grant of $100,000 toward the water tower investment. Taking this grant into account, how much should the surcharge be on each homeowner?
Zoysia University must purchase mowers for its landscape department. The university can buy five EVF mowers that cost $8,500 each and have annual, year-end maintenance costs of $1,850 per mower. The EVF mowers will be replaced at the end of Year 5 and have no value at that time. Alternatively, Zoysia can buy seven AEH mowers to accomplish the same work. The AEH mowers will be replaced after seven years. They each cost $7,500 and have annual, year-end maintenance costs of $1,925 per mower. Each AEH mower will have a resale value of $700 at the end of seven years. The university’s opportunity cost of funds for this type of investment is 9 percent. Because the university is a nonprofit institution, it does not pay taxes. It is anticipated that whichever manufacturer is chosen now will be the supplier of future mowers. What is the EAC of each type of mower?
Blossom, Inc. is considering the purchase of a warehouse directly across the street from its manufacturing plant. Blossom currently warehouses its inventory in a public warehouse across town. Rent on the warehouse and delivering and picking up inventory cost Blossom $48960 per year. The building will cost Blossom $459000. Blossom will depreciate the building for 20 years. At the end of 20 years, the building will have a $127500 salvage value. Blossom’s required rate of return is 11%. suggest whether he should buy warehouse
A university student painter is considering the purchase of a new air compressor and paint gun to replace an old paint sprayer. (Both items belong to Class 9 and have a 25 percent CCA rate.) These two new items cost $12,000 and have a useful life of four years, at which time they can be sold for $1,600. The old paint sprayer can be sold now for $500 and could be scrapped for $250 in four years. The entrepreneurial student believes that operating revenues will increase annually by $8,000. The tax rate is 22 percent and the required rate of return is 15 percent. What is the NPV of the new equipment? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) NPV $ Should the purchase be made? Yes No
3. The town of Covington is planning to build a pedestrian/bicycle bridge across a stream at a local park. The initial cost of the bridge is estimated at $400,000 with annual maintenance of $12,000. The bridge must be resurfaced every 12 years at a cost of $100,000 and must be painted every 6 years at a cost of $25,000. If the expected life of the bridge is 60 years, what is the EAC at i-4%?
Zoysia University must purchase mowers for its landscape department. The university can buy eight EVF mowers that cost $7,700 each and have annual, year-end maintenance costs of $1,635 per mower. The EVF mowers will be replaced at the end of Year 4 and have no value at that time. Alternatively, Zoysia can buy ten AEH mowers to accomplish the same work. The AEH mowers will be replaced after eight years. They each cost $6,700 and have annual, year-end maintenance costs of $1,925 per mower. Each AEH mower will have a resale value of $700 at the end of eight years. The university’s opportunity cost of funds for this type of investment is 8 percent. Because the university is a nonprofit institution, it does not pay taxes. It is anticipated that whichever manufacturer is chosen now will be the supplier of future mowers. What is the EAC of each type of mower? Note: Your answers should be a negative value and indicated by a minus sign. Do not round intermediate calculations and round your…
6 The City of Wade has a fiscal year ending June 30. Examine the following transactions for Wade: (A.) On 6/5/21, Wade opens a new landfill. The engineers estimate that at the end of 12 years the landfill will be full. Estimated costs to close the landfill are currently $4,800,000. (B.) On 6/18/21, Wade receives a donation of a vintage railroad steam engine. The engine will be put on display at the local town park. A fee will be charged to actually climb up into the engine. The engine has been valued at $650,000. (C.) On 6/30/21, Wade estimates that the landfill is 2% filled. Determine and prepare the general fund journal entries for the City of Wade for each lettered item for the purposes of preparing the fund financial statements.
Riverbed's Accounting Museum is exploring the purchase of a new building with a useful life of 15 years to use as its main gallery space. The building will cost $1,098,000. Once it has been purchased, the museum will terminate its current lease, which costs $65,700 per year. The new gallery will allow the museum to display more of its permanent collection, as well as to showcase traveling exhibits. The increased exhibit space, along with the new building's location, is expected to increase admissions revenue by $25,800 per year. Calculate the payback period for the proposed investment in the building. Assume that all cash flows occur evenly throughout the year. Payback period years
The Parkview Hospital is considering the purchase of a new autoclave. This equipment will cost $150,000. This asset will be depreciated using an MACRS (GDS) recovery period of three years. Use this information to solve, If the autoclave is sold during the third year of ownership, the allowable depreciation charge for the third year is (a) $25,000 (b) $33,338 (c) $22,215(d) $11,108.