Bit and Byte is contemplating the acquisition of acomputer system but I undecided whether it should be leased or purchased. Information regarding the system is asfollows:Equipment Purchase Information:Cash purchase price- $275,000Annual maintenance- $25,000Salvage value @ end of 3 years – $120,000Equipment Leasing Information:Annual rental fee- $ 75,000 + 10% of billings(includes maintenance)Other Information:Estimated billings:Year 1- $ 230,000Year 2- $ 250,000Year 3- $ 240,000Income tax rate – 40%Depreciation method- straight lineMinimum desired after-tax rate of return- 12%Prepare a net present value analysis that comparesthe purchase and leasing options.Which alternative is best for the company? Why?
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