A firm urgently needs a large printer and will either lease a printer at an end-of-year cost of $ 5000 for a 6 year period, or they will purchase the printer at an initial cost of $60,000

Finance Dec 26, 2020

A firm urgently needs a large printer and will either lease a printer at an end-of-year cost of $ 5000 for a 6 year period, or they will purchase the printer at an initial cost of $60,000. If purchased, the printer will have a zero salvage value at the end of 6-years life. No other costs are to be considered. MARR is 5%. What is the best investment decision on the basis of the internal rate of retum. a. IRR could not be calculated due to no change in cashflow sign b. Negative IRR is not justified and is not applied here to make a proper decision Oc Lease Od. Buy

Expert Solution

IRR is the rate at which the NPV of the project is 0.

0 = -CF0 + (CF1/((1+IRR)^1)) + (CF2/((1+IRR)^2)..... + (CF6/((1+IRR)^6)

It is necessary that there should be a change of sign in order to calculate the IRR.

Hence, Option A is the answer.

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