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(a) Calculate the Net Present Value of the Purchase Option.
(b) Calculate the Net Present Value of the Lease Option.
(c) Recommend which option should be taken and why?
Please let me know this anwsers.
A Client, Fal Staff Limited, has asked you to prepare a comparison of purchase versuslease options in regard to the acquisition of new office equipment.The equipment costs $475,000 fully installed.Option 1: Purchase Equipment in client’s name.Fal Staff Limited to provide a deposit of $100,000.Fal Staff Limited to arrange with the bank a five year interest only loan, for thebalance of the equipment cost.period.As it is to be an interest only loan, the principal to be repaid at the end of the loadInterest is payable at the end of each year at 12% per year.Depreciation is based on 20% Prime Cost.Option 2: Lease Equipment from Mojo Finance Limited.>Mojo Finance Limited offer lease payments of $110,000 payable at the beginning ofeach of the five years.A $35,000 residual is due to be paid to Mojo Finance Limited at the end of the fiveyears, whatever option is exercised.Company tax rate is 27.5% payable at the end of the year.Cost of Capital is 10%%.Required: Using Standard Financial Analysis Techniques identify financial flows, trendsin returns and adjustments in Asset Values:
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