3 Intel Inc designs and sells Electronic Signal Machines The

3. Intel Inc designs and sells Electronic Signal Machines. The company to decide on whether to Buy or Lease some new are shown below. is trying Equipment. The costs for each Alternatives nitial Cost Lease per Year Annual Operating Costs Lease Buy 350,000 85,000 8,000 23,000 40,000 8 alvage Value ife I Years 8 Which option would you recommend, based on the Present Worth method? Assume MARR (interest rate) is 8% 1. PW of Leasing 2. PW of Buying 3. Selected Option 4. PW Equation for Lease

Solution

2. PW of BUY

1. PW of LEASE

Initial Cost = 350,000

Annual operating cost = 23,000

Salvage Value = 40,000

Life = 8 years

MARR = 8%

Present Worth = 350,000 + 23,000 (P/A, 8%, 8) – 40,000 (P/F, 8%, 8)

Present Worth = 350,000 + 23,000 (5.7466) – 40,000 (0.5403)

Present Worth = 460,560

Lease per year = 85,000

Annual operating cost = 8,000

Life = 8 years

MARR = 8%

Present Worth = 85,000 (P/A, 8%, 8) +

8,000 (P/A, 8%, 8)

Present Worth = 85,000 (5.7466) +

8,000 (5.7466)

Present Worth = 488,461 + 45,973

Present Worth = 534,434

3. Selection Option – Select the buying option. Both the alternatives are cost dominated options. Hence, that alternative is to be selected where the NPW (Cost) is less. Hence, buying option is better than leasing.

4. PW equation for Lease

PW = PW of annual lease + PW of annual operating cost

PW = PW of annual lease of 85,000 + PW of annual operating cost of 8,000

Present Worth = 85,000 (P/A, 8%, 8) + 8,000 (P/A, 8%, 8)

OR

Present Worth = 93,000 (P/A, 8%, 8)

2. PW of BUY	1. PW of LEASE
Initial Cost = 350,000 Annual operating cost = 23,000 Salvage Value = 40,000 Life = 8 years MARR = 8% Present Worth = 350,000 + 23,000 (P/A, 8%, 8) – 40,000 (P/F, 8%, 8) Present Worth = 350,000 + 23,000 (5.7466) – 40,000 (0.5403) Present Worth = 460,560	Lease per year = 85,000 Annual operating cost = 8,000 Life = 8 years MARR = 8% Present Worth = 85,000 (P/A, 8%, 8) + 8,000 (P/A, 8%, 8) Present Worth = 85,000 (5.7466) + 8,000 (5.7466) Present Worth = 488,461 + 45,973 Present Worth = 534,434
3. Selection Option – Select the buying option. Both the alternatives are cost dominated options. Hence, that alternative is to be selected where the NPW (Cost) is less. Hence, buying option is better than leasing.
4. PW equation for Lease PW = PW of annual lease + PW of annual operating cost PW = PW of annual lease of 85,000 + PW of annual operating cost of 8,000 Present Worth = 85,000 (P/A, 8%, 8) + 8,000 (P/A, 8%, 8) OR Present Worth = 93,000 (P/A, 8%, 8)