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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...

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.

This question was asked on Apr 26, 2010.

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