Problem
Alternatively, Khaled Comms is also considering investment into 5G technology via leasing or buying the phone masts.
The purchase price is AED 22,000 and the machine has a 5-year life. If it buys the machine Jumeriah Comms will need to fund it using capital that costs them 9% per year.
Alternatively, the lease payments will be AED 5,250 per year for 5 years with rentals payable at the start of each year.
1. What are the respective present value costs of purchasing the machine or leasing it?
2. Explain the reasoning for the differences in cost linking to fundamentals of finance theory.