You are considering either purchasing or leasing a new computer system. Your business is set to run for 2 years.

If you purchase the system, it will cost you $100,000 up front.

This $100,000 can be depreciated at $50,000 in year 1 and $50,000 in year 2.

You must pay for maintenance at a cost of $3,000 per year which must be paid at the beginning of the year.

The anticipated residual value of the computer system is $20,000

The tax rate is 40%

The interest rate AFTER TAX is 8%.

If you lease the system, it will cost you $40,000 per year and you will also be responsible for the maintenance cost of $3,000 per year (again, which must be paid at the beginning of the year).

a.OPTION A: BUYING OPTION. Fill in the table below to calculate the NPV of the cost of buying.

Year 0

Year 1

Year 2

Net purchase price

Maintenance cost

Maintenance tax saving

Depreciation tax saving

Residual value

Tax on residual value

Net cash flow

PV

NPV

b.OPTION B: LEASING OPTION. Fill in the table below and calculate the NPV of leasing.

Year 0

Year 1

Year 2

Lease payment

Lease tax savings

Maintenance cost

Maintenance cost tax saving

Net cash flow

PV

NPV

c.Which option would you chose?