Reference no: EM13878809
A firm can buy a new printer for £2,000 payable immediately. The new printer would make cash savings for the firm of £2,000 in the first year of operation, £4,000 in the second year and £2,000 in the fifth year.
The firm makes no savings from the printer in the third and fourth year of its life, and will need to spend £4,000 on it in year 3 because of expensive repairs. The machine is scrapped at the end of 5 years, but there is no scrap value.
As an alternative to outright purchase, the firm could hire a printer, paying £1000 per annum, in advance, for the 5 years. The firm would still expect to make the same costs and savings as in outright purchase, but the hire company would meet the repair cost of year 3.
If the going rate of interest is 10%, using net present value, advise the firm as to which of the two methods (buy or hire) should be used to obtain the printer.
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