Quick-To-Change Company has decided to computerize its accounting system. The company has two alternatives that both entail the use of a computer.
- It can lease a computer under a three year contract in which the lease payments will be $4,500 each year, payable at the beginning of each year. The lessor will provide all repairs and maintenance under this arrangement.
- It can purchase the computer outright for $11,600 in cash. In this case, they will incur the following repair and maintenance costs in addition to the initial purchase price:
Paid at the end of year one $400 Paid at the end of year two $500
The computer is expected to have only a three-year useful life because of obsolescence and technological advancements. It will have no salvage value and will be depreciated using the double-declining-balance method.
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Quick-To-Change Company’s cost of capital is 12%. Please ignore any income tax effects in this problem.
A. Prepare a schedule to show the calculation of the net present value of the out-of-pocket costs for the lease alternative.
B. Prepare a schedule to show the calculation of the net present value of the out-of-pocket costs for the purchase alternative.
C. Indicate which of the two alternatives would be best, given the data provided.