Answered step by step
Verified Expert Solution
Question
1 Approved Answer
A company sells computer services to its clients. The company recently completed a feasibility study and decided to acquire an additional computer, the details of
A company sells computer services to its clients. The company recently completed a feasibility study and decided to acquire an additional computer, the details of which are as follows:
- The purchase price of the computer is K230,000; maintenance, property taxes and insurance will be K20,000 per year. The additional expenses to operate the computer are estimated at K8,000. If the computer is rented from the owner, the annual rent will be K85,000, plus 5% of annual billings. The rent is due on the last day of each year.
- Due to competitive conditions, the company feels that it will be necessary to replace the computer at the end of three years with a more advanced model. Its resalable value is estimated at K110,000.
- The corporate income tax rate is 50% and the straight-line is followed.
- The estimated annual billing for the services of the new computer will be K220,000 during the first year and K260,000 during the subsequent two years.
- If the computer is purchased, the company will borrow to finance the purchase from a bank with interest at 16% per annum. The interest will be paid regularly, and the principal will be returned in one lump sum at the end of year 3.
Assume:
- Cost of capital as 12%
- Straight-line method of depreciation
- Salvage value of K110,000
- Should the company purchase the computer or lease it?
- Evaluate the proposal from the point of view of lessor.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started