3 Evaluate, using discounting techniques, which option, lease or buy, is most financially beneficial in the scenario given in Table 8.13. You should consider the discount rate to be 10 per cent and the period of consideration to be five years.

Table 8.13 BUY Lease Purchase/lease ccst £50 000 £10 000 per year Annual operating cost £4000 per year £4000 per year Maintenance cost £2000 per year Maintained by leasing co.

Salvage value at the end of five years £20 000 not applicable The purchase of new office furniture for a boardroom has caused conflict between two factions within a company. One faction argues that the company should buy modern furniture, which will cost £12 000, and can be scrapped and risk management i 209

(replaced with zero salvage costs) in six years' time. The other favours the pur-chase of antique furniture which costs £30.000, but can be sold for £30 000 in six years' time. The modern furniture will cost £500 in maintenance and the antique £1000. You have been asked to arbitrate the decision and resolve the conflict using financial methods (calculatethe net present value of each scheme, using the company discount rate of 12 per cent).