Proust Manufacturing Co. produces personal fitness machines. The once successful line

Proust Manufacturing Co. produces personal fitness machines. The once successful line is
no longer selling well, so the company is considering production of a new improved

cardio-vascular machine. This can be done by buying needed production equipment. The

after tax cash flow for buying this equipment is $700,000, at the beginning of Year 0. The

alternative to produce the same output, is to

lease that same equipment through four equal

payments of $185,000 each year paid at the beginning of the year. The required rate of

return (hurdle rate) for this business is 12 percent. Assume no taxes. Revenue from sales

of the new cardiovascular machines is expected to be:



Year 1 – $375,000



Year 2 – $250,000



Year 3 – $140,000



Year 4 – $75,000

Calculate the net present value of both the new purchase option and the lease option.

Show all work. Determine the best option for Proust and justify your answer.

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