you have to replace a copy machine and you have 2 offers. both offers 3 year leases. offer 1 requires an up-front payment of $1700 with additional payments of $1200 at the beginning of years 2 and 3. The firm is also charged one-half of 1 cent, ($0.005), for each sheet printed, payable at the end of the year. offer 2 has no up-front cost. its lease payment is $1300, payable at the beginning of the year and the per sheet charge is 1 cent ($0.01) payable at the end of each year. you estimate that monthly use of the copy machine will be 1500 copies.
Determine an appropriate discount rate and discount the cash flows for each lease. choose the best lease based on which lease costs less in present value terms.
Answer:
option 1
interest 10% assumed
time 0 1700
time 1 1200
time 2 1200
time 3 0
using the financial calculator NPV=3782.64
0.005*1500*12=90
pmt=90, n=3, I=10% pv=223.82
pv=3782.64+223.82=4006.46
option 2
time 0 1300
time 1 1300
time 2 1300
time 3 0
beg pmt=1300 n=3 I=10%
pv=3556.20
0.01*1500*12=180
PMT=180 n=3 I=10% PV=447.63
option 2= 3556.2+447.63=4003.83
please tell me my mistake as both seems equal
Based on the calculations provided, the present value of both options seems very close. However, there may be a small mistake in the calculation for option 1 and option 2.
For option 1, the per sheet charge is $0.005, and you estimated a monthly usage of 1500 copies. Therefore, the annual payment for the per sheet charge would be: 0.005 * 1500 * 12 = $90. This amount should be deducted from the cash flows for option 1.
For option 2, the per sheet charge is $0.01, and you estimated a monthly usage of 1500 copies. Therefore, the annual payment for the per sheet charge would be: 0.01 * 1500 * 12 = $180. This amount should also be deducted from the cash flows for option 2.
After adjusting for these per sheet charges, please recalculate the present value for both options and compare them to determine the better lease option.