Marigold Design Inc. $($MD$)$ is a privately owned business that provides interior decorating options for consumers. MD follows ASPE. The software that it purchased six years ago to present clients with designs that are unique to their offices is no longer state of the art, and MD has to make a decision on replacing its software. The company has two options:

Enter into a lease agreement with Precision Inc. whereby MD makes an upfront lease payment of $$12,050$ on January $1,2024,$ and annual payments of $$4,400$ over the next five years on each December $31.$ At the end of the lease, MD has the option to buy the software for $$4,925.$ The first annual lease payment is on December $31,2024.$

Enter into a lease agreement with Graphic Inc. on January $1,2024,$ whereby MD makes five annual lease payments of $$6,575,$ beginning on January $1,2024.$ MD may purchase the software at the end of the lease period for $$200.$ This is considered a bargain price compared with the offer of $$4,925$ in the proposal from Precision.

Under both options, the software will require annual upgrades that are expected to cost $$1,540$ per year. These upgrade costs are in addition to the lease payments that are required under the two independent options. Because this additional cost is the same under both options, MD has decided to ignore it in making its choice.

The Precision agreement requires a licensing fee of $$1,030$ to be renewed annually. If MD decides on the Precision option, the licensing fee will be included in the annual lease payment of $$4,400.$ Both Precision and Graphic offer software programs of similar quality and ease of use, and both provide adequate support and training. The software under each offer is expected to be used for up to eight years, although this depends to some extent on technological advances in future years. Both offers are equivalent in terms of the product and service.

It is now early October $2023,$ and MD hopes to have the software in place by its fiscal year end of December $31,2023.$ MD is currently working on preparing its third$-$quarter financial statements, which its bank is particularly interested in seeing to ensure that MD is respecting its debt to equity ratio covenant in its loan agreement with the bank. The interest rate on the bank loan, which is MD$\text{'}$s only source of external financing, is $10\%$ per year. MD would have preferred to be able to buy rather than lease the software, but the expected purchase price of $$30,035$ exceeds the limits that the bank set for MD$\text{'}$s borrowing.