Packaging equipment for Xi Cling Wrap costs $60,000 and is expected to result in end-of-year net savings of $23,000 per year for 3 years. The equipment will have a market value of $10,000 after 3 years. The equipment can be leased for $21,000 per year, payable at the beginning of each year. Xi Cling’s MARR is 10 percent/year. Based on an internal rate of return analysis, determine if the packaging equipment should be purchased or leased.

(a) Purchase the equipment

Annual worth (AW, $)  

= - 24,000 + 23,000 + 3,000

= 2,000

(b) Leasing

AW ($) = AW of cost of leasing + AW of annual benefits

= - 23,100 + 23,000

= - 100

Since AW of savings from leasing option is negative and AW of benefits from purchase decision is positive, the equipment should be purchased.

**Since lease payments are at beginning of year, these are "annuity due" and annual lease payment is multiplied by (1 + MARR) to obtain AW.

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a manufacturer of printed circuit boards uses exponential smoothing with trend to forecast monthly demand of its product. at the end of december, the company wishes to forecast sales for january. the estimate of trend through november has been 200 additional boards sold per month. average sales have been around 1000 units per month. the demand for december was 1100 units. the company uses α = 0.20 and β = 0.10. make a forecast including trend for the month of january.