Question: Your company wants to purchase a new network file server for its wide-area computer network. The server costs $75,000. It will be completely obsolete in three years. Your options are to borrow the money at 10 percent or to lease the machine. If you lease, the payments will be $27,000 per year, payable at the end of each of the next three years. If you buy the server, you can depreciate it straight-line to zero over three years. The tax is 34 percent. Should you lease or buy?

Each of the below must be answered for the problem.

There is six-step process to identify the relevant cash flow for lease-buy decision:

1. Calculate the Loan-payment schedule

2. Calculate savings from investment tax credit

3. Calculate After-Tax effect of cash salvage value

4. Calculate the After-Tax cost of owning

5. Calculate After-Tax lease cost

6. Calculate present value advantage of owning

Making a decision:

1. If the final number is positive, it indicates that owning is less costly than leasing.

2. If the final number is negative, leasing has a cost advantage over owning.

3. If the final number is zero, or it is very small, neither leasing nor owning can be said to have a cost advantage.

There is six-step process to identify the relevant cash flow for

lease-buy decision:

Calculate the Loan-payment schedule

Calculate savings from investment tax credit

Calculate After-Tax effect of cash salvage value

Calculate the After-Tax cost of owning

Calculate After-Tax lease cost

Calculate present value advantage of owning

Making a decision:

1. If the final number is positive, it indicates that owning is less

costly than leasing.

2. If the final number is negative, leasing has a cost advantage over

owning.

3. If the final number is zero, or it is very small, neither leasing nor

owning can be said to have a cost advantage.

Each of the below must be answered for the problem.

There is six-step process to identify the relevant cash flow for lease-buy decision:

1. Calculate the Loan-payment schedule

2. Calculate savings from investment tax credit

3. Calculate After-Tax effect of cash salvage value

4. Calculate the After-Tax cost of owning

5. Calculate After-Tax lease cost

6. Calculate present value advantage of owning

Making a decision:

1. If the final number is positive, it indicates that owning is less costly than leasing.

2. If the final number is negative, leasing has a cost advantage over owning.

3. If the final number is zero, or it is very small, neither leasing nor owning can be said to have a cost advantage.

There is six-step process to identify the relevant cash flow for

lease-buy decision:

Calculate the Loan-payment schedule

Calculate savings from investment tax credit

Calculate After-Tax effect of cash salvage value

Calculate the After-Tax cost of owning

Calculate After-Tax lease cost

Calculate present value advantage of owning

Making a decision:

1. If the final number is positive, it indicates that owning is less

costly than leasing.

2. If the final number is negative, leasing has a cost advantage over

owning.

3. If the final number is zero, or it is very small, neither leasing nor

owning can be said to have a cost advantage.

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