Kotse Automotive is planning to expand its operation by planning to add a machine costing $90,000. The company is facing two possible options which areOption 1 - Lease arrangement which will require the company to pay $15,000 for 5 years and an option to purchase at $20,000 at the end of the leaseOption 2 - Purchase the machine thru debt financing which would require the company to pay $20,000 for 5 years. The company is expected to spend $1,000 every year for 5 years for the machines repairs and maintenance.Which of the two options should the company choose if costs of debt is at 9%?

To choose between Option 1 and Option 2, it is required to calculate and compare Present Value Cost…

Answered: Kotse Automotive is planning to expand…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 6P

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Kotse Automotive is planning to expand its operation by planning to add a machine costing $90,000. The company is facing two possible options which are

Option 1 - Lease arrangement which will require the company to pay $15,000 for 5 years and an option to purchase at $20,000 at the end of the lease
Option 2 - Purchase the machine thru debt financing which would require the company to pay $20,000 for 5 years. The company is expected to spend $1,000 every year for 5 years for the machines repairs and maintenance.

Which of the two options should the company choose if costs of debt is at 9%?

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