## 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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