Question

Ritchie Coliseum is looking to acquire new treadmills and stair-steppers. They can buy them from Life...

Ritchie Coliseum is looking to acquire new treadmills and stair-steppers. They can buy them from Life Fitness for $62,500 and assume the shelf-life is 8 years. This option will also come with $4,000 of upkeep costs per year. The other option they have is to rent the treadmills and stair-steppers that come with a warranty for $15,000 per year for the same time period of 8 years. The cost of capital is 8.24%. Should they buy or rent and why?

Group of answer choices

RENT, because the NPV is -85,279 which is higher than the buy option.

BUY, because the NPV is -$85,240 which is higher than the rent option.

BUY, because the NPV is -$85,279 which is higher than the rent option.

BUY, because the NPV is -85,240 which is higher than the rent option..

RENT, because the NPV is -$85,240 which is higher than the buy option.

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Answer #1

Answer: Option C: BUY, because the NPV is -$85,279 which is higher than the rent option.

GIven

For Buy Option

Price of tread mills P=62500

upkeep cost C=4000

life N=8 years

interest rate r=8.24%

So NPV of Buy Option B=-P-C*(1-(1+r)^-n)/r

B=-62500-4000*(1-(1+8.24%)^-8)/8.24%

B=-$85278.67

For Rent Option

Rent R=150000

life N=8 years

interest rate r=8.24%

So NPV of Buy Option B=-R*(1-(1+r)^-n)/r

B=-15000*(1-(1+8.24%)^-8)/8.24%

B=-$85420

From above calculation we find that NPV of Buy option is greater than Rent option so we should buy the machine.

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