Bit and Byte is contemplating the acquisition of a computer system but is undeci
ID: 2481105 • Letter: B
Question
Bit and Byte is contemplating the acquisition of a computer system but is 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 at the end of three years 120,000 Equipment Leasing Information Annual rental fee (includes maintenance) $75,000 plus 10 percent of billings.
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%
Required Prepare a net-present-value analysis that compares the purchase and leasing options. Which alternative is best for Bit and Byte?
Explanation / Answer
leasing is the better choice.
Initial Investment Year Now -275000 1 -275000 Annual maintenance(25000*(1-.40) 01 -03 -15000 2.4018 -36027 Depreciation =((275000-120000)/3 )(1-.40) 1 -03 20667 2.4018 49638.0006 Salvage value at end of three years 3 120000 0.7118 85416 Net Present Value -175973Related Questions
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