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# Lease vs Buy, Present Value, Rate of Return, Annuity

1) A company has an option to purchase equipment or \$24,000 but can lease the identical equipment for \$5,000 per month for the next 6 years. Its WACC is 7.656% and the equipment has a salvage value if \$1000 an the end of 6 years. Which option should the company take?
? Lease
? Indifference
? Not enough information to answer; cash flow from equipment is needed

2) Dad wants to buy his son a new car on his 18th birthday. His son just turned 13, and Dad estimates the new car will cost \$28,000 at the time of purchase. Rates on 5 year certificates of deposit are currently at 5%, with quarterly compounding. How much does Dad need to deposit today to have \$28k at maturity?
Options:

? 10,553
? 21,840
? 25,766
? 27,424

3) An investor deposits %18,000 into a fixed, 5-year CD with annual compounding. At the maturity date, the CD is worth \$211,000. What average annual rate was earned on this investment?
Option:
? 3.04%
? 3.23%
? 14.69%
? 17.22%

4) You deposit \$1000 dollars today in a fixed rate, tax deferred annuity, which guarantees an 8% return with quarterly compounding. Commencing with the next year, you subsequently deposit \$250 every three months at the end of the period, for the next 9 years. What is the value of the annuity at maturity?

Options:
? 10,720
? 12,999
? 15,038
? 15,298

#### Solution Preview

Note: the abbreviations have the following meanings

FVIF= Future Value Interest Factor
FVIFA= Future Value Interest Factor for an Annuity

They can be read from tables or calculated using the following equations
FVIF( n, r%)= =(1+r%)^n
FVIFA( n, r%)= =[(1+r%)^n -1]/r%

A company has an option to purchase equipment or \$24,000 but can lease the identical equipment for \$5,000 per month for the next 6 years. Its WACC is 7.656% and the equipment has a salvage value if \$1000 an the end of 6 years. Which option should the company take?
? Lease
? Indifference
? Not enough information to answer; cash flow from equipment is needed

(See calculations below)

We have to compare the PV of purchase costs with the PV of leasing costs

Purchase

Cash outflow at time 0= \$24,000
Salvage value at time 6= \$1,000
PV of salvage :

n= 6
r= 7.6560%
PVIF (6 periods, 7.656% rate ) ...

#### Solution Summary

Answers Multiple Choice Questions on Lease vs Buy, Present Value, Rate of Return, Annuity

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