Accounting 2 in Management

timer Asked: Dec 3rd, 2014

Question description

Bit and Byte is contemplating the acquisition of a computer system but I undecided whether it should be leased or purchased. Information regarding the system is as follows:

Equipment Purchase Information:

Cash purchase price- $275,000

Annual maintenance- $25,000

Salvage value @ end of 3 years - $120,000

Equipment Leasing Information:

Annual rental fee- $ 75,000 + 10% of billings (includes maintenance)

Other Information:

Estimated billings:

Year 1- $ 230,000

Year 2- $ 250,000

Year 3- $ 240,000

Income tax rate - 40%

Depreciation method- straight line

Minimum desired after-tax rate of return- 12%

Prepare a net present value analysis that compares the purchase and leasing options.

Which alternative is best for the company? Why?

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