Should the computer system be purchased

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Kaiser Permanente must install a new $1.5 million computer to track patient records in its multiple service areas. It plans to use the computer for only three years, at which time a brand new system will be acquired that will handle both billing and patient records. The company can obtain a 10 percent bank loan to buy the computer or it can lease the computer for three years. Assume that the following facts apply to the decision:

-The computer falls into the three-year class for tax depreciation, so the MACRS allowances are 0.33, 0.45, 0.15, and 0.07 in Years 1 through 4, respectively.

-The company's marginal tax rate is 34 percent.

-Tentative lease terms call for payments of $500,000 at the end of each year.

-The best estimate for the value of the computer after three years of wear and tear is $500,000.

  • What are the NAL and IRR of the lease?
  • Should the computer system be purchased?

Reference no: EM131594688

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