Question

A firm is considering leasing or buying a mower.? The mower costs $1,236 and is expected to create operating cash flows (this is the cash flows net of any taxes and other cash outflows) of $25 per year for the next three years. At the third year the mower can be sold for a net sale price of $70. If the appropriate discount rate is 5%, what is the Cost of owning the mower? If the cost is negative record your answer with a negative sign.

Answer 1

Cost of owning the mower

Present value of cash inflow = operating cash flow * PVAF ( discount rate, n periods) + sale price * PVF ( discount rate, nth period)

= 25 * PVAF(5%, 3 years) +70 * PVF(5%, 3rd year) = 25 * 2.72325 + 70 * 0.86384 = 68.08125 + 60.4688 = 128.55005

Present value of cash outflow = cost of mower * PVF (5%, 0 period) = 1,236

Cost of owning the mower = 128.55005 - 1236 = -1,107.44995 = -1,107.45

(I hope it's clear, if not please comment. I will reply in the comments)