Calculate the net present value of the new purchase option

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David Co. produces all-terrain vehicles (ATVs). The once successful line is no longer selling well, so the company is considering production of a new improved 4 passenger ATV. This can be done by buying needed production equipment. The after tax cash flow for buying this equipment is $900,000, at the beginning of Year 0. The alternative to produce the same output, is to lease that same equipment through four equal payments of $238,000 each year paid at the beginning of the year. The required rate of return (hurdle rate) for this business is 12 percent. Assume no taxes. Revenue from sales of the new 4 passenger ATV is expected to be:

Year 1 - $425,000

Year 2  $300,000

Year 3  $170,000

Year 4  $90,000

Calculate the net present value of both the new purchase option and the lease option. Show all work. Determine the best option for David and justify your answer.

Reference no: EM13766393

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