Question: A company is considering investing $10,000 in a heat exchanger. The heat exchanger will last 5 years, at which time it will be sold for $2,000. The maintenance cost at the end of first year is estimated to be $1,000. Maintenance costs for the exchanger are estimated to increase by $500 per year over its life. As an alternative, the company may lease the equipment for $X per year, including maintenance.
a. Draw a cash flow diagram of both alternatives.
b. For what value of X should the company lease the heat exchanger? The company expects to earn 8% on its investments. Assume end-of-year lease payments.