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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?

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Solution Summary

In 135 words, this solution compares the net cash flow methods for both buying and leasing in order to solve for which option is better. All calculations are provided.

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We should compare the net cash flow of both methods:

If the firm buy, the interest expense every year is 75000*10%= $7500,
And the depreciation is 75000/3 = 25000
Which will be deducted from taxable ...

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