S.ABC Ltd. Sells computer services to its clients. The company has recently completed a feasibility study and decided to acquire an addi11onal computer, the details of which are a\. follows:

( I ) The purchase price of the computer 1s t2,30,000; maintenance, property taxes and insurance will be '20,000 per Y.5ilr The addi1ional expenses to operate the computer are estimated a1 tS0,000. Jr 1he compu1er is from the owner, the annual rent will be '85,000, plus 5% of annual billings. The rent is due one the last day of each year.

(2)Due to competitive conditions, the company feels 1ha1 it will be necessary toe the computer at the end of three years with a more advanced model . Its resale value is estimated at rs 1,10,000.

(3)The corporate income tax rate is 50% and the straight line method of depreciation

is followed.

(4)The estimated annual billing for the services of the new computer will be

2, 20, 000 during the first year, and 2,60,000 during the subsequent two years.

(S) If the computer is purchased, the company will borrow to finance the purchase from a bank with interest at 16% per annum. The interest will bepaid regularly, and the principal will be returned in one Jump sum at the end of the year

Should the company purchase the computer or lease it?

Assume (i) cost of capital as 12o/o, (ii}straight line method of depreciation, (iii}salvage value of 1,10,000 and eee thesal from the PQint oCvieoflcssor also.

---------(Nov 2007,20 Marks!