Your company is planning to expand by taking over the next-door manufacturing facility.You are faced with a buy-versus-lease option. The purchase price is $1.5 million, whileyou can lease it for $270,000 per year for 10 years. If purchased, it can be sold for 40%of its original price at the end of its 10 years life. In either case the annual income isestimated to be $1.2 million and the annual operating cost would be $300,000. Yourcompany pays 38% combined income tax and the after-tax minimum attractive rate ofreturn (MARR) is 10%. Assuming lease payments are due at the end of the year andusing a straight-line depreciation over the 10 years life with full first year depreciation,determine:a. The EUAW = EUAB-EUAC for each option with MARR = 10%.Should the facility be purchased or leased?b. The break-even rate of return of purchase versus lease, i.e. ROR at which(EUAB – EUAC) purchase = (EUAB - EUAC) lease

EUAW or Estimated Uniform Annual Worth is nothing but NPV distributed equally over the life of the…

e at the end of its 10 years life. In either case the annual income 1.2 million and the annual operating cost would be $300,000. Y % combined income tax and the after-tax minimum attractive ra 10%. Assuming lease payments are due at the end of the year e depreciation over the 10 years life with full first year deprecia | = EUAB-EUAC for each option with MARR = 10%. facility be purchased or leased? even rate of return of purchase versus lease, i.e. ROR at which UAC) purchase = (EUAB – EUAC) lease -

e at the end of its 10 years life. In either case the annual income 1.2 million and the annual operating cost would be $300,000. Y % combined income tax and the after-tax minimum attractive ra 10%. Assuming lease payments are due at the end of the year e depreciation over the 10 years life with full first year deprecia | = EUAB-EUAC for each option with MARR = 10%. facility be purchased or leased? even rate of return of purchase versus lease, i.e. ROR at which UAC) purchase = (EUAB – EUAC) lease -

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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