Problem:
The Wisbley Company is contemplating the purchase of a helicopter for its executives to use in their business trips. This helicopter could be either purchased or leased from the manufacturer. The useful life of the helicopter is four years. Data concerning these two alternatives follow:
Purchase:
purchase price - $900,000
annual cash payments for service and licenses - $10,000
cash payments for repairs at end of the second year - $6,000
cash payments for repairs at end of the third year - $8,000
Salvage value - $270,000
Lease:
Annual rental payment - $250,000
If the helicopter is leased, it would be returned to the manufacturer in four years. Wisbley's required rate of return is 22%. Help Wisbley decide whether to buy or lease the helicopter.