Chapter AE, Problem AE4.2

Explanation of Solution

a.

Spreadsheet set up for buy-alternative calculation:

Let us consider the assumption inputs are given below:

• Server cost is $2,500.
• Software costs is $1,250.
• Straight-line depreciation is 3 years.
• Maintenance percentage range varies from 2 to 7 %...

Explanation of Solution

b.

Spreadsheet set up for lease-alternative calculation:

Let us consider the assumption inputs are given below:

• The cost of 3 year lease is $285.
• The cost of 2 year lease is $335.
• The cost of 1 year lease is $415.
• Discount for 20 to 30 computers is 5%.
• Discount for 31 to 50 computers is 10%...

Explanation of Solution

c.

(1)

Organization needs 20 servers for 5 years.

For Buy-Alternative calculation:

The given inputs are,

• Server cost is $2,500.
• Software costs is $1,250.
• Straight-line depreciation is 3 years.
• Maintenance percentage is 3 %.

The formula to calculate the total buy payment is given below:

Total buy payment = Depreciation + Maintenance

For 1 year:

Server cost = Server cost × servers purchased

       = 2500 × 20

       = $50,000

Software cost = Software cost × servers purchased

           = 1250 × 20

           = $25,000

Depreciation1 = (Server1 cost + software1 cost) / Depreciation year

          = (50000 + 25000) / 3

          = $25,000

Interest Expense = Server cost × maintenance percentage

    = 50000 × 0.03

    = $1,500

Maintenance = Server cost × maintenance percentage

    = 50000 × 0.03

    = $1,500

Total buy payment = Depreciation + Maintenance

       = 25000 + 1500

       = $26,500

For 2 year:

Depreciation2 = Depreciation1

         = $25,000

Interest Expense = Server cost × maintenance percentage

    = 0 × 0.03

    = 0

Maintenance = Server cost × maintenance percentage

    = 50000 × 0.03

    = $1,500

Total buy payment = Depreciation + Maintenance

       = 25000 + 1500

       = $26,500

For 3 year:

Depreciation3 = Depreciation1

            = $25,000

Interest Expense = Server cost × maintenance percentage

    = 0 × 0.03

    = 0

Maintenance = Server cost × maintenance percentage

    = 50000 × 0.03

    = $1,500

Total buy payment = Depreciation + Maintenance

       = 25000 + 1500

       = $26,500

For 4 year:

Depreciation = (Server cost + software cost) / Depreciation year

          = (0 – 0)/3

          = 0

Interest Expense = Server cost × maintenance percentage

    = 0 × 0.03

    = 0

Maintenance = Server cost × maintenance percentage

    = 50000 × 0.03

    = $1,500

Total buy payment = Depreciation + Maintenance

       = 0 + 1500

       = $1,500

For 5 year:

Depreciation = (Server cost + software cost) / Depreciation year

          = (0 – 0)/3

          = 0

Interest Expense = Server cost × maintenance percentage

    = 0 × 0.03

    = 0

Maintenance = Server cost × maintenance percentage

    = 50000 × 0.03

    = $1,500

Total buy payment = Depreciation + Maintenance

       = 0 + 1500

       = $1,500

Total Server cost:

Total Server cost = Sum of the server cost for 5 years

    = 50000+0+0+0+0

    = $50,000

Total Software cost:

Total Software cost = Sum of the software cost for 5 years

        = 25000+0+0+0+0

        = $25,000

Total depreciation:

Total depreciation= Sum of the depreciation for 5 years

    = 25000+25000+25000+0+0

    = $75,000

Salvage value:

Salvage value = (Total Server cost + Total Software cost) – Total depreciation

= 50000+25000 – 75000

= $0.00

Total cost:

Sum of yearly costs less salvage value = sum of totals buy expenses for 5 years

  = 26,500 + 26,500 + 26,500 + 1,500 + 1,500

  = $82,500

Finally, the sum of the yearly costs less salvage value is,

Total = total cost – salvage value

          = 82,500 – 0.00

          = $82,500

Therefore, the sum of the yearly costs less salvage value for buy-alternative is “$82,500”.

For Lease-Alternative calculation:

The given inputs are,

• The cost of 3 year lease is $285.
• The cost of 2 year lease is $335.
• The cost of 1 year lease is $415.
• Discount for 20 to 30 computers is 5%.
• Discount for 31 to 50 computers is 10%.

The formula to calculate the total lease payment is given below:

Total lease payment = (Payment for leased servers – Discount amount) × 12

For 1 year:

Payment for leased servers = Payment per unit × Servers leased

        = 285 × 20

        = 5700

Discount amount = Payment for leased servers × Discount

     = 5700 × 0.05

     = 285

Total lease payment = (Payment for leased servers – Discount amount) × 12

         = (5700 – 285) × 12

         = 5415 × 12

         = $64,980

For 2 year:

Payment for leased servers = Payment per unit × Servers leased

        = 285 × 20

        = 5700

Discount amount = Payment for leased servers × Discount

     = 5700 × 0.05

     = 285

Total lease payment = (Payment for leased servers – Discount amount) × 12

         = (5700 – 285) × 12

         = 5415 × 12

         = $64,980

For 3 year:

Payment for leased servers = Payment per unit × Servers leased

        = 285 × 20

        = 5700

Discount amount = Payment for leased servers × Discount

     = 5700 × 0.05

     = 285

Total lease payment = (Payment for leased servers – Discount amount) × 12

         = (5700 – 285) × 12

         = 5415 × 12

         = $64,980

For 4 year:

Payment for leased servers = Payment per unit × Servers leased

        = 335 × 20

        = 6700

Discount amount = Payment for leased servers × Discount

     = 6700 × 0.05

     = 335

Total lease payment = (Payment for leased servers – Discount amount) × 12

         = (6700 – 335) × 12

         = 6365 × 12

         = $76,380

For 5 year:

Payment for leased servers = Payment per unit × Servers leased

        = 335 × 20

        = 6700

Discount amount = Payment for leased servers × Discount

     = 6700 × 0.05

     = 335

Total lease payment = (Payment for leased servers – Discount amount) × 12

         = (6700 – 335) × 12

         = 6365 × 12

         = $76,380

Total cost:

Total = Sum of Lease payments for 5 years

= 64,980 + 64,980 + 64,980 + 76,380 + 76,380

= $347,700

Therefore, the sum of the yearly costs for lease-alternative is “$347,700”.

The screenshot ofBuy-Alternative calculation andLease-Alternative calculation:

(2)

Organization needs 20 servers for first 2 years and 40 servers for next 3 years.

For Buy-Alternative calculation:

The given inputs are,

• Server cost is $2,500.
• Software costs is $1,250.
• Straight-line depreciation is 3 years.
• Maintenance percentage is 3 %.

The formula to calculate the total buy payment is given below:

Total buy payment = Depreciation + Maintenance

For 1 year:

Server1 cost = Server cost × servers purchased

       = 2500 × 20

       = $50,000

Software1 cost = Software cost × servers purchased

           = 1250 × 20

           = $25,000

Depreciation1 = (Server1 cost + software1 cost) / Depreciation year

          = (50000 + 25000)/3

          = $25,000

Interest Expense = Server1 cost × maintenance percentage

    = 50000 × 0.03

    = $1,500

Maintenance = Server1 cost × maintenance percentage

    = 50000 × 0.03

    = $1,500

Total buy payment = Depreciation + Maintenance

       = 25000 + 1500

       = $26,500

For 2 year:

Depreciation2 = Depreciation1

            = $25,000

Interest Expense = Server1 cost × maintenance percentage

    = 0 × 0.03

    = 0

Maintenance = Server1 cost × maintenance percentage

    = 50000 × 0.03

    = $1,500

Total buy payment = Depreciation + Maintenance

       = 25000 + 1500

       = $26,500

For 3 year:

Server2 cost = Server2 cost × servers purchased

       = 2500 × 20

       = $50,000

Software2 cost = Software2 cost × servers purchased

           = 1250 × 20

           = $25,000

Depreciation3 = Depreciation2 + (Server3 cost + software3 cost) / Depreciation year

          = 25,000 + (50000 + 25000)/3

          = 25,000 + 25,000

          = $50,000

Interest Expense = (Server2 cost × maintenance percentage)

    = 50000× 0.03

    =$1,500

Maintenance = (Server1 cost × maintenance percentage) + (Server2 cost × maintenance percentage)

= (50000 × 0.03) + (50000 × 0.03)

          = 1500 + 1500

          = $3,000

Total buy payment = Depreciation + Maintenance

       = 50000+3000

       = $53,000

For 4 year:

Depreciation4 = Depreciation2

= $25,000

Interest Expense = Server cost × maintenance percentage

    = 0 × 0.03

    = 0

Maintenance = (Server1 cost × maintenance percentage) + (Server2 cost × maintenance percentage)

          = (50000 × 0.03) + (50000 × 0.03)

          = 1500 + 1500

          = $3,000

Total buy payment = Depreciation + Maintenance

       = 25000 + 3000

       = $28,000

For 5 year:

Depreciation5 = Depreciation4

          =$25,000

Interest Expense = Server cost × maintenance percentage

    = 0 × 0.03

    = 0

Maintenance = (Server1 cost × maintenance percentage) + (Server2 cost × maintenance percentage)

          = (50000 × 0.03) + (50000 × 0.03)

          = 1500 + 1500

          = $3,000

Total buy payment = Depreciation + Maintenance

       = 25000 + 3000

       = $28,000

Total Server cost:

Total Server cost = Sum of the server cost for 5 years

    = 50000+0+50000+0+0

    = $100,000

Total Software cost:

Total Software cost = Sum of the software cost for 5 years

        = 25000+0+25000+0+0

        = $50,000

Total depreciation:

Total depreciation= Sum of the depreciation for 5 years

    = 25000+25000+50000+25000+25000

    = $150,000

Salvage value:

Salvage value = (Total Server cost + Total Software cost) – Total depreciation

= 100000+50000 – 150000

= $0.00

Total cost:

Sum of yearly costs less salvage value = sum of totals expenses for 5 years

  = 26,500 + 26,500 + 53,000 + 28,000 + 28,000

  = $162,000.00

Finally, the sum of the yearly costs less salvage value is,

Total = total cost – salvage value

          = 162,000– 0.00

          = $162,000

Therefore, the sum of the yearly costs less salvage value for buy-alternative is “$162,000”.

For Lease-Alternative calculation:

The given inputs are,

• The cost of 3 year lease is $285.
• The cost of 2 year lease is $335.
• The cost of 1 year lease is $415.
• Discount for 20 to 30 computers is 5%.
• Discount for 31 to 50 computers is 10%.

The formula to calculate the total lease payment is given below:

Total lease payment = (Payment for leased servers – Discount amount) × 12

For 1 year:

Payment for leased servers = Payment per unit × Servers leased

        = 335 × 20

        = 6700

Discount amount = Payment for leased servers × Discount

     = 6700 × 0.05

     = 335

Total lease payment = (Payment for leased servers – Discount amount) × 12

         = (6700 – 335) × 12

         = 6365 × 12

         = $76,380

For 2 year:

Payment for leased servers = Payment per unit × Servers leased

        = 335 × 20

        = 6700

Discount amount = Payment for leased servers × Discount

     = 6700 × 0.05

     = 335

Total lease payment = (Payment for leased servers – Discount amount) × 12

         = (6700 – 335) × 12

         = 6365 × 12

         = $76,380

For 3 year:

Payment for leased servers = Payment per unit × Servers leased

        = 285 × 40

        = 11400

Discount amount = Payment for leased servers × Discount

     = 11400 × 0.10

     = 1140

Total lease payment = (Payment for leased servers – Discount amount) × 12

        = (11400 – 1140) × 12

         = 10260 × 12

         = $123,120

For 4 year:

Payment for leased servers = Payment per unit × Servers leased

        = 285 × 40

        = 11400

Discount amount = Payment for leased servers × Discount

     = 11400 × 0.10

     = 1140

Total lease payment = (Payment for leased servers – Discount amount) × 12

         = (11400 – 1140) × 12

         = 10260 × 12

         = $123,120

For 5 year:

Payment for leased servers = Payment per unit × Servers leased

        = 285 × 40

        = 11400

Discount amount = Payment for leased servers × Discount

     = 11400 × 0.10

     = 1140

Total lease payment = (Payment for leased servers – Discount amount) × 12

         = (11400 – 1140) × 12

         = 10260 × 12

         = $123,120

Total cost:

Total = Sum of Lease payments for 5 years

          = 76,380 + 76,380 + 123,120 + 123,120 + 123,120

          = $522,120.00

Therefore, the sum of the yearly costs for lease-alternative is “$522,120”.

The screenshot ofBuy-Alternative calculation andLease-Alternative calculation:

(3)

Organization needs 20 servers for first 2 years, 40 servers for next 2 years, and 50 servers for last year.

For Buy-Alternative calculation:

The given inputs are,

• Server cost is $2,500.
• Software costs is $1,250.
• Straight-line depreciation is 3 years.
• Maintenance percentage is 3 %.

The formula to calculate the total buy payment is given below:

Total buy payment = Depreciation + Maintenance

For 1 year:

Server1 cost = Server cost × servers purchased

       = 2500 × 20

       = $50,000

Software1 cost = Software cost × servers purchased

           = 1250 × 20

           = $25,000

Depreciation1 = (Server1 cost + software1 cost) / Depreciation year

          = (50000 + 25000)/3

          = $25,000

Interest Expense = Server1 cost × maintenance percentage

    = 50000 × 0.03

    = $1,500

Maintenance = Server1 cost × maintenance percentage

    = 50000 × 0.03

    = $1,500

Total buy payment = Depreciation + Maintenance

       = 25000 + 1500

       = $26,500

For 2 year:

Depreciation2 = Depreciation1

            = $25,000

Interest Expense = Server1 cost × maintenance percentage

    = 0 × 0.03

    = 0

Maintenance = Server1 cost × maintenance percentage

    = 50000 × 0.03

    = $1,500

Total buy payment = Depreciation + Maintenance

       = 25000 + 1500

       = $26,500

For 3 year:

Server2 cost = Server2 cost × servers purchased

       = 2500 × 20

       = $50,000

Software2 cost = Software2 cost × servers purchased

           = 1250 × 20

           = $25,000

Depreciation3 = Depreciation2 + (Server3 cost + software3 cost) / Depreciation year

          = 25,000 + (50000 + 25000)/3

          = 25,000 + 25,000

          = $50,000

Interest Expense = (Server2 cost × maintenance percentage)

    = 50000× 0.03

    =$1,500

Maintenance = (Server1 cost × maintenance percentage) + (Server2 cost × maintenance percentage)

          = (50000 × 0.03) + (50000 × 0.03)

          = 1500 + 1500

          = $3,000

Total buy payment = Depreciation + Maintenance

       = 50000 + 3000

       = $53,000

For 4 year:

Depreciation4 = Depreciation2

           = $25,000

Interest Expense = Server cost × maintenance percentage

    = 0 × 0.03

    = 0

Maintenance = (Server1 cost × maintenance percentage) + (Server2 cost × maintenance percentage)

          = (50000 × 0.03) + (50000 × 0.03)

          = 1500 + 1500

          = $3,000

Total buy payment = Depreciation + Maintenance

       = 25000 + 3000

       = $28,000

For 5 year:

Server3 cost = Server3 cost × servers purchased

       = 2500 × 10

       = $25,000

Software2 cost = Software2 cost × servers purchased

           = 1250 × 10

           = $12,500

Depreciation5 = Depreciation4+ (Server5 cost + software5 cost) / Depreciation year

          = 25000 + (25000 + 12500) / 3

          = 25000 + 12500

          = $37,500

Interest Expense = Server cost × maintenance percentage

    = 25000 × 0...