ABC company wants to get an additional computer to supplement its time share computer services. They have the following options:

Option A: To buy the computer for 45,00,000

Option B: To lease the computer for three years from a leasing company for 10,00,000 as annual lease rent (Plus 15% of gross time share revenue)

Lease rents are payable at the end of the year and the company revers to the lessor at the end of three years.

ABC company estimates that the computer under review will be worth 15,00,000 at the end of the third year. The forecast revenues are:

Year 1: 47,50,000

Year 2: 55,00,000

Year 3: 50,00,000

In both the options, the annual operating costs (without depreciation) are estimated to be 18,00,000 with an additional of 2,00,000 for training and start-up costs at the beginning of the first year.

These costs are borne by the lessee under both A and B options.

The company will borrow @14% interest to finance the acquisition of the computer. Repayments are to be made according to this schedule:

Year end ___Principal Amount ___Interest Amount ___Total

1 ___15,00,000 ___6,30,000 ___21,30,000

2 ___15,00,000 ___4,20,000 ___19,20,000

3 ___15,00,000 ___2,10,000 ___17,10,000

The company depreciates its assets on Straight Line Method and tax rate applicable to the company in 25%.

Select the better alternative from the two.

Note: I am struggling with this question, so I would appreciate if some of the difficult steps were explained for me to understand the sum better. Thank you so much for solving it, have a great day!