Arlandria, Inc. has bought a new server and is having to decide what to do with

Question

Arlandria, Inc. has bought a new server and is having to decide what to do with the old one. The cost of the old server was originally $60,000 and has been depreciated by $45,000. The company has received two offers that it must consider. One offer was made to sell the equipment outright for $18,500 less a 5% sales commission. The other offer was to lease the equipment to a customer for $7,000/year for the next five years but the company will be required to provide maintenance and insurance totaling $3,000 per year. What offer should Arlandria, Inc. accept? <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Explanation / Answer

Hi,

If the equipment is sold, value realized would be = 18500 - .05*18500 = 17575

Value realised if the equipment is leased = (7000 - 3000)*5 = 20000

Benefit Realized in case of Lease = 20000 - 17575 = 2425

Since the value realized would be more in the case of lease, the equipment should be leased by the company.

Thanks.

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