A small strip-mining coal company is trying to decide whether it should purchase or lease a new clamshell. If purchased, the “shell” will cost $150,000 and is expected to have a $65,000 salvage value after 6 years. Alternatively, the company can lease a clamshell for only $20,000 per year, but the lease payment will have to be made at the beginning of each year. If the clamshell is purchased, it will be leased to other strip-mining companies whenever possible, an activity that is expected to yield revenues of $12,000 per year. If the company’s MARR is 15% per year, should the clamshell be purchased or leased on the basis of a future worth analysis? Assume the annual M&O cost is the same for both options.
What will be an ideal response?
FWpurchase = -150,000(F/P,15%,6) + 12,000(F/A,15%,6) + 65,000
= -150,000(2.3131) + 12,000(8.7537) + 65,000
= $-176,921
FWlease = -20,000(F/A,15%,6)(F/P,15%,1)
= -20,000(8.7537)(1.15)
= $-201,335
Purchase the clamshell
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