Reference no: EM131819152

A piece of new equipment costs $15,000. A small company has $5,500 available cash and can make a down payment of $5,500 to buy the equipment. A credit union offers a five-year, 10% loan on the $9,500 difference if the company buys the equipment. The monthly payment for the loan is $201.85. Alternatively, the company can purchase a used piece of equipment for $5,500. Maintenance costs for the new equipment will be $100 for the first year, and $300 per year for the second and third years. Maintenance costs for the used equipment will be anywhere from $650 to $2,650 for the first year, $700 to $2,700 for the second year, and $500 to $2,500 for the third year. There might be additional maintenance costs for the used equipment each year. There is a 20% chance that additional maintenance costs are $500, a 20% chance they are $2,500, and a 60% chance they are $1,500. The salvage value of the new equipment at the end of three years will be approximately $8,000 and you will still owe $4,374 on your loan. The salvage value of the used equipment at the end of three years will be approximately $2,000. Should you buy the new or used equipment based on a comparison over three years on a yearly basis?