Kiddy toy corporation needs to acquire the use of a machine to be used in its manufacturing process. the machine needed is manufactured

Question

Kiddy Toy Corporation is looking to acquire a machine for its manufacturing process, which is manufactured by Lollie Corp. This machine has a useful life of 12 years, after which it can be sold for $17,000. Lollie Corp has presented Kiddy with the following options regarding the acquisition of the machine (consider using the appropriate factor(s) from the provided tables):

Purchase the machine outright for $167,000 in cash. Kiddy Toy Corporation will also be responsible for all insurance costs, which are approximately $12,000 per year.

Lease the machine for a 12-year period, with an annual lease payment of $32,000 due immediately. In this case, Lollie Corp will cover all insurance costs, and the machine will revert back to Lollie at the end of the 12-year term.

To make an informed decision, please determine which option Kiddy Toy Corporation should choose, assuming a 10% interest rate properly reflects the time value of money. Additionally, please ignore income tax considerations.

Oceane Schmidt · Accepted Answer

The lease would be a better option as their net preset worth is lower than purcahse the machine and carry their cost.Explanation:Option A purchaseF0 -160,000 operating cost 5000 per year we solve for the present value of an annuityC5,000.00time10rate0.12 PV-$28,251.1151 PV of the salvage value   Maturity  $10,000.0000 time  10.00 rate  0.12000   PV   3,219.7324 present worth-160,000 – 28,251.11 + 3,219.73 = -185.031,38Option B Lease10 payment beginning immediatly of $25,000Therefore, it is an annuity-dueC25,000.00time10rate0.12PV-$158,206.2448

Anonymous · Answer

The machine should be leased because it is cheaper when compared to buying the machine. Explanation:To determine which option kiddy should choose , we are to calculate the net present value of buying the machine and the present value of payments thay kiddy would make if they lease the equipment. Net present value is the present value of after tax cash flows from an investment less the amount invested. NPV can be calculated using a financial calculator: Cash flow in year 0 = $-161,000Cash flow each year from year 1 to 11 = $-6,000Cash flow in year 12 = $-6,000 + $11,000 = $5,000I = 11%NPV = $-196,809.89Present value of lease payment Cash flow each year from year 1 to 11 = $-26,000I = 11%PV = $-161,369.40The machine should be leased because it is cheaper when compared to buying the machine. To find the NPV using a financial calacutor:1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction. 3. Press compute Present value can be calculated using the same steps as above I hope my answer helps you

Yazmin Lockman

Kiddy toy corporation needs to acquire the use of a machine to be used in its manufacturing process. the machine needed is manufactured

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