A company sells computer services to its clients. The company recently completed a feasibility study and decided to acqu
Posted: Sun Apr 17, 2022 7:01 pm
A company sells computer services to its clients. The company
recently completed a feasibility study and decided to acquire an
additional computer, the details of which are as follows:
1) The purchase price of the computer is K230,000; maintenance,
property taxes and insurance will be K20,000 per year. The
additional expenses to operate the computer are estimated at
K8,000. If the computer is rented from the owner, the annual rent
will be K85,000, plus 5% of annual billings. The rent is due on the
last day of each year.
2) Due to competitive conditions, the company feels that it will
be necessary to replace the computer at the end of three years with
a more advanced model. Its resalable value is estimated at
K110,000.
3) The corporate income tax rate is 50% and the straight-line is
followed.
4) The estimated annual billing for the services of the new
computer will be K220,000 during the first year and K260,000 during
the subsequent two years.
5) 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 be paid regularly, and the principal will be
returned in one lump sum at the end of year 3.
Assume: a) Cost of capital as 12% b) Straight-line method of
depreciation c) Salvage value of K110,000
REQUIRED: I. Should the company purchase the computer or lease
it?
II. Evaluate the proposal from the point of view of lessor.
recently completed a feasibility study and decided to acquire an
additional computer, the details of which are as follows:
1) The purchase price of the computer is K230,000; maintenance,
property taxes and insurance will be K20,000 per year. The
additional expenses to operate the computer are estimated at
K8,000. If the computer is rented from the owner, the annual rent
will be K85,000, plus 5% of annual billings. The rent is due on the
last day of each year.
2) Due to competitive conditions, the company feels that it will
be necessary to replace the computer at the end of three years with
a more advanced model. Its resalable value is estimated at
K110,000.
3) The corporate income tax rate is 50% and the straight-line is
followed.
4) The estimated annual billing for the services of the new
computer will be K220,000 during the first year and K260,000 during
the subsequent two years.
5) 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 be paid regularly, and the principal will be
returned in one lump sum at the end of year 3.
Assume: a) Cost of capital as 12% b) Straight-line method of
depreciation c) Salvage value of K110,000
REQUIRED: I. Should the company purchase the computer or lease
it?
II. Evaluate the proposal from the point of view of lessor.