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andreyandreev [35.5K]
3 years ago
5

A firm needs a data center with a life of three years. After three years, the data center is not needed and has no salvage value

. The firm is deciding on the least costly alternative to access the data center. Under Plan A, the firm can incur an upfront cost of $120, 000. For this amount, the firm can purchase the center and move in immediately and use the facility. Under Plan B, the firm may lease the data center from owners on a monthly basis. The monthly rent is $3, 500. The firm’s borrowing cost based on APR (annual percentage rate) is 5% with semiannual compounding. Which option would you recommend to the firm? Purchase or rent? Show work. (20 pts.)
Business
1 answer:
Tema [17]3 years ago
5 0

Answer:

Recommendation : The firm should lease the data center

Explanation:

<em>To determine which option is better, we would compare the upfront cost of option A to the present value of the lease payment.</em>

<em>The present value of the lease payment is given as follows:</em>

PV = A×  1-1+r^(-n) /r

A- semi-annual  lease payment - 3,500× 6 =  21,000

r- semi-annual interest rate = 5%/2 = 2.5%

n- number of period = 3× 2 = 6.(note that interest is compounded semi- annually i.e every six month)

PV of the lease payment =  21,000 × (1 - 1.025^(-6))/0.025 =115,670.63.

Comparing the two options, we have :

Purchase cost = 120,000

Lease cost = 115,670.63.

The lease cost is lower and would save the firm 4329.37 i.e (120,000 - 115,670.63)

Recommendation : The firm should lease the data center

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