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Kiddy Toy Corporation needs to acquire the use of a machine to be used...

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Question

Accounting

Kiddy Toy Corporation needs to acquire the use of a machine to be used in its manufacturing process. The machine needed is manufactured by Lollie Corporation. The machine can be used for 10 years and then sold for $15,000 at the end of its useful life. Lollie has presented Kiddy with the following options:

  1. Buy machine. The machine could be purchased for $165,000 in cash. All maintenance costs, which approximate $10,000 per year, would be paid by Kiddy.

  2. Lease machine. The machine could be leased for a 10-year period for an annual lease payment of $30,000 with the first payment due immediately. All maintenance costs will be paid for by the Lollie Corporation and the machine will revert back to Lollie at the end of the 10-year period.

Required:

Assuming that a 12% interest rate properly reflects the time value of money in this situation and that all maintenance costs are paid at the end of each year, determine which option Kiddy should choose. Ignore income tax considerations.

PV

Buy option

Lease option

Kiddy should choose

Answer & Explanation Solved by verified expert
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