Answers
Answer:
Initai Cost C=10000
| Year | Maintenance Cost Mi |
| 1 | 1000 |
| 2 | 1500 |
| 3 | 2000 |
| 4 | 2500 |
| 5 | 3000 |
A)
B)
rate =8%
Number of Years N=5
Salvage Value S= 2000
When NPV of Lease is less than or equal to NPV of Purchase then he should buy lease
NPV of Lease = X*(1-(1+r)^-N)/r
NPV of Lease = X*(1-(1+8%)^-5)/8% =3.99X
NPV of Purchase = ∑Mi/(1+r)^i +S/(1+r)^N-C
| Year | Maintenance Cost Mi | PV of Mi |
| 1 | 1000 | 925.93 |
| 2 | 1500 | 1286.01 |
| 3 | 2000 | 1587.66 |
| 4 | 2500 | 1837.57 |
| 5 | 3000 | 2041.75 |
| ∑Mi/(1+r)^i | 7678.92 |
NPV of Purchase = 7678.92 -2000/(1+8%)^5+10000= 16317.76
SInce NPV of Lease <=NPV of Purchase
3.99X <=16317.76
X<=4086.89
10000 25000 3000 2000 1500 1000 Maintenance Cost Salvage 2000
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