Question

Which of the following is true?

a) St. Martin is better off not using the lease because the present value (PV) of the lease-buy cash flows is close to -100,000 (negative 100,000).
b) St. Martin is better off not using the lease because the present value (PV) of the lease-buy cash flows is close to 100,000 (positive 100,000).
c) St. Martin is better off using the lease because the present value (PV) of the lease-buy cash flows is close to 100,000 (positive 100,000).
d) St. Martin is better off using the lease because the present value (PV) of the lease-buy cash flows is close to -100,000 (negative 100,000).

Answer 1

The correct answer is d) St. Martin is better off using the lease because the present value (PV) of the lease-buy cash flows is close to -100,000 (negative 100,000).

Step-by-step explanation:

The question asks which of the following statements is true regarding St. Martin's use of a lease. From the options given, the correct answer is d) St. Martin is better off using the lease because the present value (PV) of the lease-buy cash flows is close to -100,000 (negative 100,000).

When assessing the present value of cash flows, a negative present value indicates that the costs outweigh the benefits, while a positive present value indicates that the benefits outweigh the costs. Therefore, if the present value of the lease-buy cash flows is close to -100,000, it means that using the lease is more advantageous for St. Martin as the benefits are greater than the costs.

It's important to consider the present value of the cash flows when making financial decisions, as it helps determine the profitability and feasibility of different options.