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Emma runs a small factory that needs a vacuum oven for brazing small fittings. She can purchase the model she needs for $180,000 up front, or she can lease it for five years for $4,200 per month. She can borrow at 7% APR, compounded monthly. Assuming that the oven will be used for five years, should she purchase the oven or should she lease it?

A. Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven.

B. Lease, since the present value (PV) of the lease is $12,224 less than the cost of the oven.

C. Lease, since the present value (PV) of the lease is $2,212 less than the cost of the oven.

D. Lease, since the present value (PV) of the lease is $8,642 less than the cost of the oven.

Answer :

The correct answer is C. Lease, since the present value (PV) of the lease is $2212 less than the cost of the oven.

To determine whether Emma should purchase or lease the vacuum oven, we need to compare the present value (PV) of both options.

First, let's calculate the PV of leasing the oven for five years. The monthly lease cost is $4200, so the total lease cost over five years is $4200 * 12 months * 5 years = $252,000.

Next, we need to calculate the PV of purchasing the oven. The upfront cost is $180,000.

Now, let's calculate the PV of both options using the borrowing rate of 7% APR compounded monthly.

PV = Cash Flow /[tex](1 + r)^n[/tex]

For the lease option:
PV_lease = $252,000 /[tex](1 + 0.07/12)^(^1^2^*^5)[/tex] = $179,788

For the purchase option:
PV_purchase = $180,000

Comparing the two PVs, we find that PV_lease is $179,788 and PV_purchase is $180,000.

Therefore, the PV of the lease is $212 less than the cost of the oven.

Hence, the correct answer is C. Lease, since the present value (PV) of the lease is $2212 less than the cost of the oven.

In summary, based on the present value comparison, it is more financially advantageous for Emma to lease the vacuum oven rather than purchasing it upfront.

Learn more about present value from given link: https://brainly.com/question/30390056

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