XYZ Ltd$.$ is considering to acquire an additional computer to supplement its time

share computer services. It has options

A $.$To purchase the computer for Rs$\mathrm{.}45,00,000$ B$.$ To lease the computer for $3$ years from a leasing company for Rs$\mathrm{.}10,00,000$ as annual

lease rent plus $15\%$ of gross time share revenue.

Lease rents are payable at the year end and the computer revers to the lessor at the end of

three years.

The company estimates that the computer under review will be worth Rs$\mathrm{.}15$ lakhs at the

end of the $3$rd year. Forecast revenues are

Year $1$ Rs$\mathrm{.}47,50,000$

Year $2$ Rs$\mathrm{.}55,00,000$

Year $3$ Rs$\mathrm{.}50,00,000$

Under both the options, annual operating costs $($excluding depreciation$)$ are estimated at

Rs$\mathrm{.}18$ lakhs with an additional Rs$\mathrm{.}2$ lakhs for start up and training costs at the beginning of

the first year.

These costs are borne by the lessee under both the options. The company will borrow @

$14\%$ interest to finance the acquisition of the computer. Repayments are to be made

according to the following schedule

Year Principal $($Rs$.)$ Interest $($Rs$.)$ Total $($Rs$.)$

$115,00,0006,30,00021,30,000$

$215,00,0004,20,00019,20,000$

$315,00,0002,10,00017,10,000$

The company depreciates its assets on straight line method and tax rate applicable to the

company is $25\%$

Decide on the better option