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Buy or lease: depreciation and interest calculation

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1. Lease or Buy. 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

This job evaluates whether depreciation and interest calculation is best.

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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 ...

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