LEASE VS. BUY

Trask Company is trying to decide whether it should purchase or lease a new automated machine to be used in the production of a new product. If purchased, the new machine would cost $100,000 and would be used for 5 years. The salvage value at the end of the 5 years is: $5,000. The annual operating costs are: $12,000. Annual revenues are estimated at $47,000. The cost of capital is 12%.

-Calculate the Payback Method – if the criteria is 5 years, what is the decision?

-Calculate the Accounting Rate of Return – if the criteria is 10%, what is the decision?

-Set up a table to calculate the Net Present Value of the purchase option.

-If the machine is leased, the company would need to pay annual lease payments of $20,700. The first lease payment and a deposit of $5,000 are due today. The next 4 lease payments are due in years 1 through 4. The deposit is refundable during the 5th year. A contract to cover all the operating costs will cost $30,000 today and will cover all the maintenance/operating costs during the life of the lease. Annual revenues are estimated at $47,000. The cost of capital is 12%.

-Set up a table to calculate the Net Present Value of the lease option.

-Compare the two options – which one would you choose and why?