Any help solving the following problem is welcomed -- web sites,
formulas, etc.

1. Lease or Buy. Your company wants to purchase a new network file
server for its wide-area computer network.  The server costs $75,000. 
It will be completely obsolete in three years.  Your options are to
borrow the money at 10 percent or to lease the machine.  If you lease,
the payments will be $27,000 per year, payable at the end of each of
the next three years.  If you buy the server, you can depreciate it
straight-line to zero over three years.  The tax is 34 percent. 
Should you lease or buy?

Boobee -

Greetings again: it's good to see you back.

In setting up this problem, we'll assume that in borrowing, the
company can stage its loan payments at the end of the year - just the
like the lease.  It simplifies calculations of Net Present Value (NPV)
of payments.

In the lease scenario, the company is paying out $27,000 -- but really
only 66% of that or $17,820 each year (after taxes).  You'll see a
spreadsheet with totals here:
http://www.mooneyevents.com/Lease.xls

In the purchase scenario, only $7,500 is due on borrowed money each
year - and it's more than offset by the $8,500 tax savings.  The
purchase actually ADDS cash to the company in Year 1 and Year 2. 
However, in Year 3 we have to pay off the original $75,000 and $7,500
in interest.

You can see that the net cash out is $53,460 in a lease scenario and
$72,000 if the company buys the equipment outright. I suspect that is
the answer - lease because the cash required is so much higher in the
purchase scenario.

However, I've taken it one step further to incorporate Net Present
Value of payments.  Having credits in Year 1 and Year 2 (if you buy
the equipment) could be very valuable with a high interest rate (as
you might see in Brazil).  With an interest rate of 10%, let's
discount each year's payments to see what their NPV is today.  To get
the present value, end of year 1 gets divided by 1.1; end of year 2
gets divided by 1.1*1.1 or 1.21; end of year 3 gets divided by
1.1*1.1*1.1 or 1.33.  You can see that it narrows the difference
between leasing and buying - but that it's still advantageous to
lease.

If any part of this answer is unclear, please request a clarification
before rating this answer.

Best regards,


Omnivorous-GA