Rachel is putting together a growth plan for ESI. She is evaluating whether to

substantially invest in company owned equipment, and whether to outsource her online

services personnel to a call center in New Dehli, India. Rachel has asked for your

analysis of the following two decisions facing ESI:

$1.$ Equipment Purchase $-$ ESI may decide to purchase outright additional computer

equipment. ESI can continue to lease equipment from hardware vendors. Such a

status quo decision comes with known margins and profitability metrics. The

status quo is embodied in the income statement and balance sheet reported in

$202$x data given above. Rachel believes adding owned equipment to its existing

leasing business will enable ESI to more fully utilize their fixed assets, grow

faster and provide more customized services to a larger group of future clients.

Rachel is proposing to purchase $$500,000$ of additional IT equipment. The

equipment would be installed and prepared for use in the current year. When fully

utilized the equipment would generate asset turnover of approximately $2$x gross

investment. It would likely take four years to reach full utilization. The useful life

of equipment for accounting and tax purposes is $10$ years. However, due to rapid

life cycles in enterprise technology, after six years Rachel expects to sell the

equipment for $10\%$ of initial cost. The EBITDA $($operating income plus

depreciation and amortization$)$ margin of business done with owned equipment is

$1\mathrm{.}1$x the margin of business done with leased equipment.