The Blank Button Company Is Considering the Purchase of a New

question 19

Essay

The Blank Button Company is considering the purchase of a new machine for £30,000.The machine is expected to save the firm £12,500 per year in operating costs over a 5 year period, and can be depreciated on a straight-line basis to a zero salvage value over its life.Alternatively, the firm can lease the machine for £6,500 per year for 5 years, with the first payment due in 1 year.The firm's tax rate is 34%, and its cost of debt is 10%.Calculate the NPV of the lease versus the purchase decision. Calculate the reservation payment of the lessee.

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Definitions:

Inferior Goods

Products whose demand decreases as the income of the consumer increases, contrasting with normal goods.

Substitute Goods

Products or services that can be used in place of one another, satisfying similar needs or desires.

Complementary Goods

are products or services that are used together, where the use or consumption of one increases the demand for the other.

Close-Substitute

A good or service that can easily replace another in satisfying consumer needs, with very little change in consumption patterns.