Your company is considering acquiring an additional computer to supplement its time-share computer services to its clients. It has two options:

1. To purchase the computer at K22 million
2. To lease the computer for three years from the leasing company at K5million as annual lease rent plus 10% of gross time-share service revenue. The agreement also requires an additional payment of K6 million at the end of third year. Lease rents are payable at the year-end and the computer under review will be worth K10 million at the end of third year.

Forecast revenues are as follows:

Year	1	2	3
Amount (K million)	22.5	25	27.5

Annual operating costs excluding depreciation and lease rentals of computers are estimated at K9 million with an additional K1 million for start-up and training costs at the beginning of the first year. These costs are to be borne by the lessee. Your company will borrow at 16% interest to finance the acquisition of the computer. Repayments are scheduled as follows:

Year end	1	2	3
Principal	K5 million	K8.5 million	K8.5 million
Interest	K3.52 million	K2.72 million	K1.36 million

The company uses straight line method to depreciate its assets and pays 50% tax on its income. The management approaches you to advice. Which alternative will you recommend and why?

Answer rating: 100% (QA)

Answers Question Which Alternative is better Purchase or lease of the computer Answer The alternativ... View the full answer