Answer :
After comparing the costs, Emma should purchase the vacuum oven for her factory as it would be more cost-effective, with a total cost of $231,416 compared to $252,000 for leasing over five years. However, other factors like maintenance costs and cash flow should be considered, and consulting with a financial advisor is recommended.
To determine whether Emma should purchase or lease the vacuum oven for her factory, we need to compare the costs of both options and consider the financial implications.
Let's start by calculating the total cost of purchasing the oven. The upfront cost is $180,000. Since the oven will be used for five years, there are no additional costs associated with the purchase option.
Next, let's calculate the total cost of leasing the oven for five years. The monthly lease cost is $4,200, so the total lease cost for five years would be $4,200 multiplied by 12 months and then by 5 years, which equals $252,000.
Now, let's consider the cost of borrowing the money needed to purchase the oven. The annual percentage rate (APR) is 7%, compounded monthly. To calculate the interest expense, we can use the formula:
Interest Expense = Principal Amount × (1 + Monthly Interest Rate)^(Number of Months) - Principal Amount
For the purchase option, the principal amount is $180,000, the monthly interest rate is 7% divided by 12, and the number of months is 60 (5 years multiplied by 12 months).
Using this formula, the interest expense for borrowing $180,000 at 7% APR compounded monthly for five years would be approximately $51,416.
To compare the total costs of purchasing and leasing, we need to consider the sum of the upfront cost and the interest expense for purchasing, and the total lease cost for leasing.
For the purchase option:
Total Cost = Upfront Cost + Interest Expense
Total Cost = $180,000 + $51,416
Total Cost = $231,416
For the lease option:
Total Cost = Lease Cost
Total Cost = $252,000
Based on the calculations, purchasing the oven would be more cost-effective for Emma compared to leasing it. The total cost of purchasing the oven is $231,416, while the total cost of leasing it is $252,000. Therefore, Emma should choose to purchase the oven.
It's important to note that this analysis assumes that Emma will use the oven for the entire five-year period and doesn't consider other factors such as maintenance costs, resale value, or potential upgrades. Emma should also consider her cash flow and the availability of funds for purchasing the oven upfront. It's recommended for Emma to consult with a financial advisor or accountant to make an informed decision based on her specific circumstances and business needs.
To know more about annual percentage rate (APR), refer to the link below:
https://brainly.com/question/31952501#
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