This is the difference between the $300,000 cash purchase price and the annual lease payment of $68,000 multiplied by the present value of an annuity factor for 5 years at 6% (the factor rounded to 3 decimals). Because the first lease payment is due immediately, the lease payments are to be made at the beginning of each period, not at the end of each period. This is an annuity due instead of an ordinary annuity. The present value factor for an annuity due is the factor for one period less than the total number of periods, plus 1.000.
This is the difference between $68,000 × 5, which is $340,000, and the $300,000 purchase price. The lease payments include interest at 6%, so the portion of each payment that is interest should not be included in the net price for the machine under the lease.
The purchase would take place for $300,000 cash at Year 0. The lease would require 5 payments of $68,000 each, with the first payment to be made immediately. This is an annuity due, where the annuity payments are made at the beginning of the period instead of the end of the period. To determine whether the lease or the purchase would be more advantageous, the present value of the annuity payments discounted at 6% is compared with the cash purchase price to find which present value is lower. The present value of the annuity payments on the lease is equal the principal amount of the lease, which is the amount that would be paid for the machine under the lease. The present value factor for an annuity due is the factor for one period less than the number of periods, plus 1.000. The present value factor for 4 years (5 years minus 1) at 6% is 3.465. 3.465 + 1.000 = 4.465, and that is the factor to use to calculate the present value of the lease payments. The present value of the lease payments is $68,000 × 4.465, which equals $303,620. The cash purchase price of $300,000 is $3,620 less than the present value of the lease payments. Thus Monroe Company should purchase the machine because the purchase cost will be $3,620 less than the leasing cost.
This is not the correct answer. Please see the correct answer for an explanation. We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice -- not its letter, because that can change with every study session created. The Question ID number appears in the upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materials better.
|
