Reference no: EM13340882

Big Al's currently leases its equipment from Pizza Products for $2,500 per month. Two years of the five-year lease term remain. Big Al's can terminate the lease at any time by paying a penalty of $10,000. Big Al's is considering purchasing equipment to replace the leased equipment. Big Al's must purchase 10 units of each piece of equipment. Big Al's can purchase equipment at the following prices:

Required

A. Using NPV analysis, compare the present value of the lease payments with the cost of buying the equipment. Assuming a discount tale of 10 percent before tax which option is preferable?

B. Big Al's has the option of purchasing equipment from another supplier at a cost of $190,000. The supplier promises that the new equipment will reducc operating costs by $1,000 per month over the life of the equipment. Assuming a 10 percent discount rate (before tax), which option is preferable?

C. Calculate the after-tax NPV for each option discussed previously. If pur-chased, all equipment will be depreciated over five years, using straight-line depreciation, and will have no salvage value. Big Al's tax rate is 30 percent. Is your decision still the same?

What factors other than cost savings should Big Al's consider in these decision problems?