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10. You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease the equipment to you for $9,700 per year if you sign a guaranteed five-year lease (the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease. Alternatively, you could buy and maintain the equipment yourself. The cash flows from doing so are listed below (the equipment has an economic life of five years). If your discount rate is 7.3%, what should you do? Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 - $39,700 - $2,000 $2,000 - $2,000 -$2,000 $2,000 The net present value of the leasing alternative is $ (Round to the nearest dollar.) The net present value of the buying alternative is $ (Round to the nearest dollar.) What should you do? (Select from the drop-down menus.) The cost of (1) is less, so you should (2) the equipment. (1) O leasing (2) O lease buying O buy 11. The CEO of Garneau Cinemas is considering making a movie and must decide between a comedy and a thriller-it doesn't have the production space to make both. The comedy is expected to cost $25 million up front (at t = 0). After that, it is expected to make $17 million in the first year (at t = 1) and $4 million in each of the following two years (at t = 2 and t = 3). In the fourth year (at t = 5), it is expected that the movie can be sold into syndication for $2 million with no further cash flows back to Garneau Cinemas. The thriller is expected to cost $35 million up front (at t = 0). After that, it is expected to make $20 million in the first year (at t = 1) and $3 million in each of the following four years (at t = 2, 3, 4, and 5). In the sixth year (at t = 6), it is expected that the movie can be sold into syndication for $25 million with no further cash flows back to Garneau Cinemas. The cost of capital is 10%, and Garneau usually requires projects to have a payback within four years. Determine each project's payback and NPV, and advise the CEO what she should do. The payback for the comedy is years, and the NPV of the comedy is $ The payback for the thriller is years, and the NPV of the thriller is $ (Round to two decimal places as needed.) Advise the CEO. Choose the correct answer below. O A. Since the comedy has the higher NPV, it should be selected. O B. Since the thriller has the higher NPV, it should be selected. O C. Since one project has a negative NPV, the other project should be selected even though it has a payback greater than four years. If that project's longer payback period is unacceptable, then neither project should be accepted. O D. Since only one of the projects has a payback period of less than four years, it should be selected. Projects that pay the company back quicker are always preferable to projects that do not pay the company back as quickly. 12. Gateway Tours is choosing between two bus models. One is more expensive to purchase and maintain but lasts much longer than the other. Its discount rate is 11.5%. The company plans to continue with one of the two models for the foreseeable future. Based on the costs of each shown below, which should it choose? (Note: dollar amounts are in thousands.) Model Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Old Reliable - $200 - $3.9 - $3.9 - $3.9 - $3.9 -$3.9 - $3.9 - $3.9 Short and Sweet - $101 - $1.9 - $1.9 - $1.9 - $1.9 Based on the costs of each model, which should it choose? (Select the best choice below.) O A. Gateway Tours should choose Old Reliable because the equivalent annual annuity of its costs is smaller. O B. Gateway Tours should choose Short and Sweet because the equivalent annual annuity of its costs is smaller. O C. Gateway Tours should choose Old Reliable because it lasts longer. O D. Gateway Tours should choose Short and Sweet because the NPV of its costs is smaller. 13. You have to buy a new copier. The cost of the copier is $1,950, plus $415 per year in maintenance costs. The copier will last for five years. Alternatively a local company offers to lease the copier to you and do the maintenance as well. If your discount rate is 5.9%, what is the most you would be willing to pay per year to lease the copier? (Your first lease payment is due in one year.) (Select the best choice below.) O A. The most you would be willing to pay per year to lease the copier is $3,702.90. O B. The most you would be willing to pay per year to lease the copier is $876.67. O C. The most you would be willing to pay per year to lease the copier is $1,950. O D. The most you would be willing to pay per year to lease the copier is $415