Planning to lease a computer

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Reference no: EM13946833

Royal Troon Inc is planning to lease a computer for $6,500 per annum, payable in advance, for a period of 4 years. The lease will cover maintenance expenses. Royal Troon’s chairman feels that if he buys the same computer he should be able to sell it at 45% of the purchase price after 4 years. However, in case of purchase, the company must pay annual maintenance expenses of $600 at the end of each year. The pretax cost of debt of Royal Troon is 7% and its income tax rate is 40%. If Royal Troon buys the computer, it will depreciate it fully in 4 years. What is the maximum price that Royal Troon should pay for this computer? Assume that Royal Troon can take the tax credit for lease payments a year later.

Reference no: EM13946833

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