Bit and Byte sells computer services to its clients. The firm is contemplating the acquisition of a

Question:

Bit and Byte sells computer services to its clients. The firm is contemplating the acquisition of a computer but is undecided whether it should be leased or purchased. Information regarding the computer is as follows:
EQUIPMENT PURCHASE INFORMATION
Cash purchase price ............ $275,000
Annual maintenance ............ 25,000
at the end of three years ..... 120,000

EQUIPMENT LEASING INFORMATION
Annual rental fee (includes maintenance) .... $75,000 plus 10 percent of billings

OTHER INFORMATION
Estimated billings:
Year 1 .................. $230,000
Year 2 .................. 250,000
Year 3 ................... 240,000
Annual operating expenses .......... 75,000
Equipment setup ............... 20,000
Income tax rate .............. 40%
Depreciation method .......... Straight-line
Minimum desired after-tax rate of return ..... 12%

Required
Prepare a analysis that compares the purchase and leasing options. Which alternative is best for Bit and Byte?

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