Answered: A small strip-mining coal company is…

Financial Accounting: The Impact on Decision Makers

10th Edition

ISBN:9781305654174

Author:Gary A. Porter, Curtis L. Norton

Publisher:Gary A. Porter, Curtis L. Norton

Chapter4: Income Measurement And Accrual Accounting

Section: Chapter Questions

Problem 4.5DC: Depreciation Jensen Inc., a graphic arts studio, is considering the purchase of computer equipment...

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A small strip-mining coal company is trying to decide
whether it should purchase or lease a new
clamshell. If purchased, the “shell” will cost
$150,000 and is expected to have a $65,000 salvage
value after 6 years. Alternatively, the company can
lease a clamshell for only $20,000 per year, but the
lease payment will have to be made at the beginning
of each year. If the clamshell is purchased, it
will be leased to other strip-mining companies
whenever possible, an activity that is expected to
yield revenues of $12,000 per year. If the company’s
MARR is 15% per year, should the clamshell
be purchased or leased on the basis of a future
worth analysis? Assume the annual M&O cost is
the same for both options.

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