Reference no: EM133928050

Problem

Widget Co. needs to acquire the use of a piece of equipment to manufacture its products. The equipment needed is manufactured by Gear Inc. The equipment can be used for 7 years and then sold for $20,000 at the end of its useful life. Gear has presented Widget with the following options: Buy the equipment. The equipment could be purchased for $200,000 in cash. All maintenance costs, which approximate $10,000 per year, would be paid by Widget. Lease the equipment. The equipment could be leased for a 7-year period for an annual lease payment of $40,000 with the first payment due immediately. All maintenance costs will be paid for by the Gear Inc. and the equipment will revert back to Gear at the end of the 7-year period. Get the instant assignment help. Assuming that a 10% interest rate properly reflects the time value of money in this situation and that all maintenance costs are paid at the end of each year, determine which option Widget should choose for its present value. Ignore taxes.