Net present value (LO 3) AutoQuest 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 AutoQuest, 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 is uncertain whether he should buy or lease the servers. If he buys the servers for $4.3 million, AutoQuest will incur annual maintenance costs of $50,000 over their five-year life. If he leases the servers for five years, AutoQuest will make lease payments of $1.2 million in each of the first three years and of $1 million in each of the last two years. Annual maintenance costs under the lease will be $80,000.
Required
a. Which option will cost the company less to implement, assuming a 12% discount rate?
b. What salvage value would AutoQuest need to receive on the purchased servers at the end of year 5 so that the purchase option is essentially equal to the lease option? Assume a 12% discount rate.
c. What annual cash inflow from the new online sales would be necessary for the lease option to be financially acceptable? Assume a 12% discount rate.
d. What nonfinancial issues might Dan Jennings consider in deciding whether to purchase or lease the servers?