Kiddy Toy Corporation needs to acquire the use of a machine to be used in its manufacturing process. The machine neededis manufactured by Lollie Corporation. The machine can be used for 15 years and then sold for $20,000 at the end of itsuseful life. Lollie has presented Kiddy with the following options:1. Buy machine. The machine could be purchased for $170,000 in cash. All maintenance costs, which approximate$15,000 per year, would be paid by Kiddy.2. Lease machine. The machine could be leased for a 15-year period for an annual lease payment of $35,000 with thefirst payment due immediately. All maintenance costs will be paid for by the Lollie Corporation and the machine willrevert back to Lollie at the end of the 15-year period.Required:Assuming that a 12% interest rate properly reflects the time value of money in this situation and that all maintenance costsare paid at the end of each year, determine which option Kiddy should choose. Ignore income tax considerations.Note: Round your final answers to nearest whole dollar amount. Use tables, Excel, or a financial calculator. (FV of $1, PVof $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)Buy optionLease optionKiddy should chooseLeasePV

Answered: Image /qna-images/answer/6e084d07-4754-4ccc-9c6a-0eab0ad3b5e0.jpg

mine could be purchased for $170,000 in cash. All maintenance costs, which d be paid by Kiddy. chine could be leased for a 15-year period for an annual lease payment of diately. All maintenance costs will be paid for by the Lollie Corporation and he end of the 15-year period.

mine could be purchased for $170,000 in cash. All maintenance costs, which d be paid by Kiddy. chine could be leased for a 15-year period for an annual lease payment of diately. All maintenance costs will be paid for by the Lollie Corporation and he end of the 15-year period.

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

10th Edition

ISBN:9781337902571

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter12: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 10P: Dauten is offered a replacement machine which has a cost of 8,000, an estimated useful life of 6...

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Question

Kiddy Toy Corporation needs to acquire the use of a machine to be used in its manufacturing process. The machine needed
is manufactured by Lollie Corporation. The machine can be used for 15 years and then sold for $20,000 at the end of its
useful life. Lollie has presented Kiddy with the following options:
1. Buy machine. The machine could be purchased for $170,000 in cash. All maintenance costs, which approximate
$15,000 per year, would be paid by Kiddy.
2. Lease machine. The machine could be leased for a 15-year period for an annual lease payment of $35,000 with the
first payment due immediately. All maintenance costs will be paid for by the Lollie Corporation and the machine will
revert back to Lollie at the end of the 15-year period.
Required:
Assuming that a 12% interest rate properly reflects the time value of money in this situation and that all maintenance costs
are paid at the end of each year, determine which option Kiddy should choose. Ignore income tax considerations.
Note: Round your final answers to nearest whole dollar amount. Use tables, Excel, or a financial calculator. (FV of $1, PV
of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1)
Buy option
Lease option
Kiddy should choose
Lease
PV

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