Your company wants to purchase a new network file server for its wide-area computer network. Should you lease or buy?
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Your company wants to purchase a new network file server for its wide-area computer network. The server costs $75,000. It will be completely obsolete in three years. Your options are to borrow the money at 10 percent or to lease the machine. If you lease, the payments will be $27,000 per year, payable at the end of each of the next three years. If you buy the server, you can depreciate it straight-line to zero over three years. The tax is 34 percent. Should you lease or buy?
Also, what are the formulas for analyzing these two scenarios?
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Solution Summary
The following questions helps with questions involving purchasing network servers. Charts and detailed explanations are provided.
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Lease vs. Buy -- Network Server
Year 1 Year 2 Year 3 TOTAL
Lease $27,000 $27,000 $27,000
Net cash out (after taxes) $17,820 $17,820 $17,820 $53,460
Present value (10%) $16,200 $14,727 $13,398 $44,325
Buy $7,500 $7,500 $82,500
Depreciation $25,000 ...
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