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Mountain Springs, a partnership operated by the Von Trapp family is contemplating the purchase of a new computer and software to help prepare the
Mountain Springs, a partnership operated by the Von Trapp family is contemplating the purchase of a new computer and software to help prepare the delivery schedules and accounts receivable billing for its deliveries of spring water to customers. The total cost of the system is $80000 and will last for four years, at which the disposal value is $20000. The firm uses straight-line method of depreciation and plans to depreciate the asset to its expected disposal value. The partners think the computer system will save $30000 annually in operating expenses (excluding depreciation and taxes). The firm has been offered a four- year lease contract with annual payments of $21000 beginning when the contract comes into effect, and with a residual value of $20000. The lessor has offered to absorb all insurance and maintenance costs (worth $3000 per year, payable in advance). The partners have a marginal tax rate of 20%. Alternatively, a loan finance is available at 13% per annum. REQUIRED: Evaluate whether the firm should lease the system.
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