Question

Packaging equipment for Xi Cling Wrap costs $60,000 and is expected to result in end-of-year net savings of $23,000 per year for 3 years. The equipment will have a market value of $10,000 after 3 years. The equipment can be leased for $21,000 per year, payable at the beginning of each year. Xi Cling’s MARR is 10 percent/year. Based on an internal rate of return analysis, determine if the packaging equipment should be purchased or leased.

Answer 1

(a) Purchase the equipment

Annual worth (AW, $)

`=-60,000 \mathrm{x} \mathrm{A} / \mathrm{P}(10 \%, 3)+23,000+[10,000 \mathrm{x} \mathrm{A} / \mathrm{P}(10 \%, 3) \mathrm{x} \mathrm{P} / \mathrm{F}(10 \%, 3)]`
`=-60,000 * 0.4+23,000+[10,000 * 0.4 * 0.75]`

= - 24,000 + 23,000 + 3,000

= 2,000

(b) Leasing

AW ($) = AW of cost of leasing + AW of annual benefits

`=-21,000 \mathrm{x}(1.1) * *+23,000`

= - 23,100 + 23,000

= - 100

Since AW of savings from leasing option is negative and AW of benefits from purchase decision is positive, the equipment should be purchased.

**Since lease payments are at beginning of year, these are "annuity due" and annual lease payment is multiplied by (1 + MARR) to obtain AW.