What is the firm paying for the flexibility

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Reference no: EM131806859

Question: The construction firm of Cathy Strong & Daughters can purchase some construction equipment for $100K. After 5 years, it will have a salvage value of $15K. The firm can also lease the equipment for $25K per year. If the equipment is leased for 5 years the firm has an option to buy the equipment for $10K. If a fair interest rate is 9%, what is the firm paying for the flexibility of being able to stop leasing the equipment after 1, 2, 3, or 4 years? (Find the breakeven equivalent annual value of the difference between buying and leasing.)

Reference no: EM131806859

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