Question

Mary Tellas, the production manager at Rogers Corp. is considering a new computer numerical control machine...

Mary Tellas, the production manager at Rogers Corp. is considering a new computer numerical control machine for a cost of $250,000, with annual operating expenses of $20,000 per year. The equipment is expected to last seven years and have residual value of $20,000 at that time. The firm requires a 12% return on its investment. A lease is also being considered. The lease would require a down payment of $20,000 and monthly payment of $4,300 for the seven-year period. Compare the purchase and lease alternatives on an annual cost basis. Please also draw TVM diagrams for both ways.

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Answer #1

Present value of purchase option is calculated in excel and screen shot provided below:

Present value of purchase option is $332,228.15

Now,

Present value of leasing option is calculated in excel and screen shot provided below:

Present value of leasing option is $263,588.35.

Since, Present value of leasing option is lower than Present value of purchasing option. So company should lease the equipment instead of purchasing.

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