Global Sights is an online travel and event booking company. To enhance productivity and reduce operating costs it is planning to update its computer system. The new system would save the company approximately $45,000 per annum in administration costs.
The purchase price of the new system is $68,000. The system will have a life of five years and a resale value of $12,500. Intensive use of the system will require entry into a service contract of $4,550 per annum, payable in advance.
The system will be depreciated at 30% per annum, straight-line method. The firm's tax rate is 30% payable at the end of the year of income. For evaluation purposes the appropriate after tax discount rate is 14%.
The distributor of the system is offering a five year operating lease at $21,500 per year payable in advance covering both the purchase price and ongoing maintenance costs. There is no option to purchase at the end of the lease.
What is the after-tax advantage of the purchase option?
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