Question

Whispering Winds has been selling auto parts to the general public for over 70 years. It has built a reputation for outstanding customer service, becoming the third largest auto parts retailer in the Southwest. Hoping to expand its sales to other regions, managers have decided to establish an online retail presence. Dan Jennings, CIO of Whispering Winds, is charged with the task of evaluating how the company should implement this strategy.

One of the first things Dan needs to determine is how to acquire the network servers the company will need. He knows the vendor he wants to use, but he is uncertain whether he should buy or lease the servers. If he buys the servers for $4,239,800, Whispering Winds will incur annual maintenance costs of $49,300 over their five-year life. If he leases the servers for five years, Whispering Winds will make lease payments of $1,183,200 in each of the first three years and of $986,000 in each of the last two years. Annual maintenance costs under the lease will be $78,880.

-Calculate the present value of the purchase and lease option assuming a 12% discount rate

Answer 1

Solution:-