Determine which offer harrison should choose

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Reference no: EM133632616

Question: Harrison Corporation is deciding whether to lease or buy a machine. The machine needed is manufactured by Schultz Inc. The machine can be used for 7 years and then sold for $5,000 at the end of its useful life. Schultz has offered Harrison Corporation the following two options:

a. Buy Machine. The machine could be purchased for $120,000 in cash. All maintenance and insurance costs, $10,000 a year, would be paid by Harrison.

b. Lease Machine. The machine could be leased for a 7-year period for an annual lease payment of 40,000 with the first payment due immediately. All maintenance and insurance costs will be paid for by Schultz Inc. and the machine will revert back to Schultz at the end of the 7-year period.

Assuming that a 8% interest rate is appropriate and that all maintenance and insurance costs are paid at the end of each year, determine which offer Harrison should choose. Why?

Reference no: EM133632616

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