Acquisition of Equipment
Response to the following problem:
The manager of the Taylor Company has consulted you, the controller, as to which of the following plans you would recommend in acquiring the use of a piece of heavy equipment:
1. Purchase the equipment and pay immediately a cash price of $36,800. The service life of the heavy equipment is estimated to be five years, with a resale value at the end of that time of $5,500.
2. Lease the equipment at the rate of $9,100 per year for five years, payable at the beginning of each year.
Required:
Assuming that the time value of money is 12%, evaluate the two alternatives and indicate which plan you would recommend to the manager, stating the value of savings to the company.