I would like some assistance with this analysis.  Help me please!

1.	Company wants to purchase a new server. 
2.	Costs = $75,000.  
3.	Server obsolete in three years.  
4.	Should you borrow the money at 10 percent? Or lease the equipment. 
5.	If you lease, the payments will be $27,000 per year, payable at the
end of each of the next three years.
6.	If you buy the server, you can depreciate it straight-line to zero
over three years.
7.	The tax is 34 percent.  
8.	Should you lease or buy?

Hi poppaguy!
In order to decide whether you should lease or buy the equipment, you
should compare the net present value (NPV) of both options, and go
with the one that has the highest NPV. Since you mention that 10% is
the interest rate, I'll assume that's the rate at which future cash
flows should be discounted.

Recall that the formula fpr NPV is:

NPV = C0 + C1/(1+r) + C2/(1+r)^2 + C3/(1+r)^3 + ...

where r is the discount rate; and C0, C1, C2, ... are cash flows that
occur at time 0, time 1, etc.

* Leasing the server
I'll assume here that you don't need to borrow any money in order to
lease the server. Since you'll have to pay $27,000 at the end of each
of the next three years, then the NPV of this option is:

NPV = - 27000/(1+0.1) - 27000/(1+0.1)^2 - 27000/(1.01)^3
NPV = -$67,145

So the NPV of the cost of the lease is $67,145

* Buying the server
This case is a bit more complicated. I'll assume here that you have to
borrow tha full $75,000 in order to buy it. I'll also assume that you
pay the interest ($7,500) yearly , and at the third year you must make
the interest payment plus the capital payment (75000 + 7500 =
$82,500). So, the cash flow related to this loan is:

Year 0: 75000
Year 1: -7500
Year 2: -7500
Year 3: -82500

Regarding the depreciation, straight-line means you'll be able to
depreciate $25,000 at the end of each of the next three years. Since
depreciation is subtracted from the firm's income, this depreciation
will make you save (34% of $25,000) $8,500 per year in taxes. This
counts as a positive cash flow. So let's review the cash flows if you
buy the server:

          Cost of buying       Loan-related        Tax-related    Total CF
Year 0      -75000               75000                  0            0        
Year 1         0                 -7500                8500          1000
Year 2         0                 -7500                8500          1000
Year 3         0                -82500                8500        -74000

Therefore, the NPV of this option is:

NPV = 1000/(1+0.1) + 1000/(1+0.1)^2 -74000/(1+01)^3
NPV = -$53,861.75

Therefore, since the NPV of buying the server is higher than the NPV
of leasing it, you should buy it. We've just found that it's less
expensive to do so.


I hope this helps! If you have any questions regarding my answer,
please don't hesitate to request a clarification. Otherwise I await
your rating and final comments.

Best wishes!
elmarto

Thanx for your help!  I was on the right path with my calcualtions. 
You made the problem more clear to me.

I differ in opinion from what Elmato offered and this is the approach I have taken

Lease payments per Year = 27,000 at end of each year
But you get a tax break on lease and so your net cash outflow per year
really is 27000 *(1-tax rate) = 27000 * 66% = 17,820
Net present value of 17,820 per year for 3 years = 17820/(1.1) +
17820(1.1*1.1) + 17820/(1.1*1.1*1.1) = -$44,316

Now if you were to buy this equpment and pay off the loan at end of 3
years you have the following  cash outflows: -

a) Interest payment per year @ 75000 * 10 % * 1-tax = 4950 for year 1
, 2 and year 3
NPV of Interest payout = 4950/1.1 + 4950/1.1*1.1 + 4950/1.1*1.1*1.1 = -$12,310
b) Depreciation tax shield per year = 25000 * tax = 25000*34% =8500
NPV of 8500 for years 1 thru 3  using the same formula = +$21,138 
c) Finally loan repaid at end of year 3 = 75000 and the present value
of that 75000 today = 75000/(1.1*1.1*1.1) = -$56,349

Adding a b and c = -12310+21138-56349 = -$47,520

Since the NPV of lease(-44,316) is smaller than npv of buying(-47,520)
its cheaper to lease than to buy