However, even though AIAd the depreciation will still be over the three years so the NPVs of depreciation are shown for each period.

This of course means that for an outright purchase in year 0 at a discount factor of 10% would return over a three year period a return in real terms of £188.81 less than the investment. Then again, as depreciation is added back before tax is calculated such is not really a consideration for us here.

More importantly as you suggest is the opportunity cost of the income tied up in the purchase. The interest on this when compared against the money that would have been spent leasing the computer when taking into account the NPV is £40.57 over the comparable period.

Note that I calculated the NPV on the lost interest rather than calculating NPV on the Opportunity cost as that just seemed wrong.

Removing from this the variance on the depreciation over the period to allow for the time cost of capital we come to a more comparative figure or £953.76 for actual cost of purchase.

CONCLUSION

So, overall, excluding tax from the calculations the real comparisons would be between a leasing NPV of £1,095.07 (which takes into account the NPV of the lease payments less the NPV of additional interest on the opportunity cost)  with a somewhat  contrived figure of £953.76 for outright purchase.

On the face of matters and assuming that all rates remain constant over the period then purchase would seem to be the better option.

However, all of the above does not consider tax implications due to such not being required as part of this exercise.

As with all statistics there are many other ways of looking at the figures.

For example, (using 10k as a complete guess as to current assets employed and applying 15% ROCE as suggested in your original post) making the investment may adjust the return on investment of your client. Take a look at these figures which quite rightly show that the computer will not make any difference to the actual return :

So as you can see the ROI would fall from 15% to 13.51%

Using Residual Income rather than ROI would yield the following results :

So under both ROI and RI the return would be less by investing in the new computer and in purely practical terms there would be no reason to buy it unless the current income would fall without it. (Doubtful).

Of course, we all know that ROI is not the only reason for purchases of this nature.

ROI and RI look at matters only in purely financial terms and do not in this instance take into account any increases in efficiency which would be difficult to substantiate.

Hope that I've helped rather than just confussed matter further,

All the best,

Shaun.

P.S. I'll just keep my fingers crossed that this is all readable when it gets posted!

P.S.2 Well, it lost two of the inserts and filled the doc with XML tags at first post. Lets see how this attempt goes.

P.S.3 I made a mistake in my original posting and used the purchase price as the opportunity cost rather than the difference between the purchase cost and the rentals to date. (must remember, less haste, more speed!).