Frank Inc Is Trying to Decide Whether to Lease or Purchase

question 38

Multiple Choice

Frank Inc. is trying to decide whether to lease or purchase a piece of equipment needed for the next ten years. The equipment would cost $45,000 to purchase, and maintenance costs would be $5,000 per year. After ten years, Frank estimates it could sell the equipment for $20,000. If Frank leased the equipment, it would pay a set annual fee that would include all maintenance costs. Frank has determined after a net present value analysis that at its hurdle rate of 10%, it would be better off by $5,700 if it buys the equipment. What would the approximate annual cost be if Frank were to lease the equipment?

• A) $9,000
• B) $7,000
• C) $12,000
• D) $13,250

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Definitions:

Assessment

Process of gathering information about a person’s symptoms and their possible causes.

Reliability

The consistency of a measure or test; its ability to produce the same results under similar conditions.

Generalizability

The extent to which the findings of a study or experiment can be applied to larger populations or different contexts beyond the original subjects or conditions studied.

Validity

The extent to which a test, measurement, or research accurately reflects or assesses the specific concept that it is intended to measure.