Hugo is the CEO of Hugo Enterprises. Hugo must determine whether to buy or lease a machine that is critical for production at his plant. He has asked his asset manager to determine which one of these options is the better alternative. Here is the data, which is common to both options: Internal Rate of Return: 7.5% Machine Life: 5 years Year Sales 1 $ 250,000 2 $ 300,000 3 $ 390,000 4 $ 546,000 5 $ 819,000 In option 1, Hugo will buy the machine for $1.5 million. Annual operating costs will be 10% of revenue, and the machine will have a $100 thousand salvage value at the end of year 5. In option 2, Hugo will lease the machine for $350,000/year. Installation cost of the machine at the beginning of the first year is $50,000. Since the lease contract includes maintenance, operating costs will be only 5% of revenue per year. Finally, at the end of the fifth year, the lease contract requires a $25,000 final inspection fee.
a) Using NPV, which is the better alternative?
b) Based on your analysis in part a, would you be inclined to choose the other option to reduce
On problem 2 of your homework, you had to evaluate whether to lease or buy a machine. If you receive a 10% discount on the purchase price, you would ________________.
A. Buy the machine
B. Lease the machine
C. A purchase discount (although appreciated), does not have any impact on the decision.
D. What in the world are you talking about?
E. A and C are true F. B and C are true