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Apple Co. 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
Apple Co. 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. Their options are to borrow the money at 10% or to lease the machine. If they lease, the payments will be $27,000 per year, payable at the end of each of the next three years. If they buy the server, it depreciates straight- line to zero over three years. The tax rate is 34 percent.
Required:
a. Determine whether Apple Co. should lease or buy the equipment. (15 marks)
b. Explain how the different borrowing rates of lessor and lessee affect the calculation of the net advantage of leasing (NAL).
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