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Lease vs Buy Decision for a new computer system

If purchased, a new computer system will cost $50,000 installed. The computer system has an estimated economic life of six years. Kinko's would depreciate the computer system as a 5 year asset under MACRS rules to a $0 estimated salvage value. If purchased, Kinko's could borrow the needed funds from PNC Bank at a 10 percent pretax annual percentage rate of interest.

If Kinko's decides to lease the computer system, it will be required to make six beginning of year lease payments of $11,000 each. Kinko's weighted cost of capital is 12 percent (after tax) Kinko's marginal tax rate is 40 percent.

Under both the lease alternative and the borrow and buy alternative, Kinko's will contract with a computer service company to handle the estimated annual service and maintenance costs.

If the computer system is owned and Kinko's borrows the needed funds from PNC in the form of a bullet loan carrying a 10 percent interest rate instead of an equal payment loan at 10 percent, what effect would this have on the decision to lease or buy?

Solution Summary

Evaluates Lease vs Buy Decision for a new computer system.