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Question 2 Orchid Berhad (Orchid) wants to purchase a new network file server for its wide-area computer network. The server costs RM200,000. It will
Question 2 Orchid Berhad (Orchid) wants to purchase a new network file server for its wide-area computer network. The server costs RM200,000. It will be completely obsolete in ten years. Orchid is having an alternative to borrow the money at 10% or to lease the server. If Orchid lease, the payments will be at RM35,000 per year, payable at the beginning of each year of the next ten years. If Orchid buys the server, Orchid can depreciate the server using straight-line to zero over ten years. The tax rate is 35%. From the above information you are required to answer the following questions. a. Prepare the Cash Flows Analysis by clearly showing the Net Advantage of Leasing (NAL). (8 Marks) b. Based on NAL in part (a), should Orchid lease or purchase the server? Explain your (2 Marks) answer. (Total: 10 Marks)
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