1. A commercial farmer wants to acquire a mechanised feed spreader that costs $80,000. He intends to operate the equipment for 5 years, at which time it will need to be replaced. However, it is...

1.

A commercial farmer wants to acquire a mechanised feed spreader that costs $80,000. He intends to operate the equipment for 5 years, at which time it will need to be replaced. However, it is expected to have a salvage value of $10,000 at the end of fifth year. The asset will be depreciated on a straight-line basis ($16,000 per year) over the 5 years, and the farmer is in a 30% tax bracket. Two options of financing the equipment are available. A lease calls for lease payments of $19,000 annually, payable in advance. A debt alternative carries an interest of 10% and debt payments will be at the start of each of the 5 years using mortgage type of debt amortisation.

Required:

i. Using present-value method, determine the best alternative

ii. Using the internal rate of return method, which is the best alternative. Does your answer differ from that to part (i).