Question 3

1. Your company, Kemuning Berhad, wants to purchase a new network file server for its wide-area computer network. The server costs RM65,000. It will be completely obsolete in three years. You are having an alternative to borrow the money at 10 percent or to lease the server. If you lease, the payments will be at RM27,000 per year, payable at the end of each of the next three years. If you buy the server, you can depreciate it straight-line to zero over three years. The tax rate is 40 percent. Should you lease or buy the server? (10 Marks)
2. Taxes are an important consideration in the leasing decision. Who is more likely to lease, a profitable corporation in a high tax bracket or a corporation with less profit in a low tax bracket? Explain you answer. (5 Marks)

(Total: 15 Marks)