Autopay Systems is a payroll service provider company. To enhance productivity and reduce operating costs it is planning to update its computer system.The new system would save the company approximately $35,000 per annum in administration costs.

The purchase price of the new system is $55,000.The system will have a life of four years and a resale value of $9,000. Intensive use of the system will require entry into a service contract of $3,500 per annum, payable in advance.

The system will be depreciated at 40% p.a. straight line method. The firms tax rate is 30% payable at the end of the year of income.For evaluation purposes the appropriate after tax discount rate is 10%.

The distributor of the system is offering a four year operating lease at $20,000 per year payable in advance. There is no option to purchase at the end of the lease.

1. Present Value of Purchase Option:

2. Present Value of Lease Option:

3. After Tax advantage of Lease / Purchase Option