Suppose you are contemplating the purchase of a commercial lawn mower at a cost of $10,000. The expected lifetime of the machine is three years. You can lease the asset to a local business for $4,000 annually (payable at the end of each year) for three years. The lessee is responsible for the upkeep and maintenance of the machine during the three-year period.

If you can borrow (and lend) money at an interest rate of 8 percent, will the investment be a profitable undertaking?

Yes

No

Is the project profitable at an interest rate of 12 percent? Provide calculations in support of your answer.

Yes

No

Question

Jayvon Oconnor

Business

20 February, 01:00

Suppose you are contemplating the purchase of a commercial lawn mower at a cost of $10,000. The expected lifetime of the machine is three years. You can lease the asset to a local business for $4,000 annually (payable at the end of each year) for three years. The lessee is responsible for the upkeep and maintenance of the machine during the three-year period.

If you can borrow (and lend) money at an interest rate of 8 percent, will the investment be a profitable undertaking?

Yes

No

Is the project profitable at an interest rate of 12 percent? Provide calculations in support of your answer.

Yes

No

+5

Answers (1)

Know the Answer?

Skyla · Answer 1

At the interest rate of 8%, The answer is Yes. The investment is profitable.

At the interest rate of, the answer is No. The investment is not profitable

Explanation:

For the investment to be profitable, its NPV discounted at the interest rate should be greater than the initial cost of investment of $10,000.

For scenario 1, the interest rate is 8%, the NPV is:

NPV = (4,000/0.08) x (1 - 1.08^-3) = $10,308.4; which is greater than $10,000. Thus, the investment is profitable

For scenario 2, the interest rate is 12%, the NPV is:

NPV = (4,000/0.12) x (1 - 1.12^-3) = 9,607.3; which is lower than $10,000. Thus, the investment is unprofitable.