Lewis Securities Inc. has decided to acquire a new market data and quotation sys

Question

Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current market prices and other information from several online data services and then either displays the information on a screen or stores it for later retrieval by the firm’s brokers. The system also permits customers to call up current quotes on terminals in the lobby.

The equipment costs and, if it were purchased, Lewis could obtain a term loan for the full purchase price at a interest rate. Although the equipment has a useful life, it is classified as a special-purpose computer and therefore falls into the MACRS class. If the system were purchased, a maintenance contract could be obtained at a cost of , payable at the beginning of each year. The equipment would be sold after , and the best estimate of its residual value is . However, because real-time display system technology is changing rapidly, the actual residual value is uncertain.

As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis that Consolidated Leasing would be willing to write a guideline lease on the equipment, including maintenance, for payments of at the beginning of each year. Lewis’s marginal federal-plus-state tax rate is . You have been asked to analyze the lease-versus-purchase decision and, in the process, to answer the following questions.

What is the net advantage to leasing (NAL)? Does your analysis indicate that Lewis should buy or lease the equipment? Explain.

Explanation / Answer

the total monetary savings that would result from a business choosing to lease an asset as opposed to nuying it outright.the benefit of leasing is determined by comparing the net present value of purchasing the asset outright to net present value of leasing it.NAL present value calculations can take into account depreciation, the expected life of the asset, cost of repairs to the asset, expectations of interest rate changes and so on. NAl is expressed as the money that would be saved by leasing an asset instead of buying it, not taking into account the cost of capital

Lewis should buy the equipment. Taking into account the fast paced technological changes and the fact that a lease payment takes into account all the costs that get examined when we buy an asset, it is advisable to lease the asset. Moreover, the company need not invest a large amount as a one time investment for which the residual value is uncertain. The company also would be in a position to keep changing its requirements depending upon the technological changes that are taking place.

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