Then write a 350-400 word paper comparing the factors involved in deciding whether to purchase or lease the equipment.
Management has decided to acquire a new asset that costs $200.000. The estimated economic life of the asset is five years. but the firm wants the use of the asset only for three years If the firm purchases the asset. it anticipates selling it at the end of three years for $50.000.
The firm may lease the asset for $55.000 a year paid at the end of each year. The lease does not include maintenance. It is estimated that annual maintenance initially will be 55.000 (paid at the end of the year). but that cost will increase by 51.000 each yearn the asset ages.
The firm could purchase the asset with a few year loan of 5200.000. The loan will be retired in five payments of 540.000 unless the equipment is sold. in which case the loan must be paid off at closing of the sale. The interest rate is 10 percent and is paid at the end of each year on the balance owed. The annual interest payment is provided below.
If the firm does purchase the asset it will enter into a maintenance agreement with the manufacturer that costs 55.000 a year.