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Profitability analysis: loan or operating leasing? The XYZ company is considering investing in a new production line. The cost of purchasing the line with assembly is: PLN 450,000. It is known that the line can operate for 9 years, but the amortization period is 6 years. In order to finance the investment, the company may use a bank loan, thus financing the entire investment. The cost of the bank loan is 15%. An alternative to credit is operating lease, under the following conditions: - the leasing period is 6 years, - the line can be repurchased for 6 years and then use for another 3 years, - the annual leasing payment is PLN 110,000 and is payable at the end of individual periods. - the initial fee is 10% The income tax rate is 19%. Please determine which form of financing is more financially attractive for this company.
Credit Periods 0 1 N 3 4 01 5 6 7 8 9 Calulation of CF CF 450 000 Calculation of COF Closing balance of credit Capital instalment Interest Amortization Tax shield (interest) Tax shield (amortisation) COF k ef* D COF Sum D COF D CF check Operating lease Periods 0 1 2 3 4 5 01 6 7 8 9 Calculation of CF CF 450 000
Calculation of COF 45 000 Inital fee Lease payment Repurchase Amortization (repurchase) Tax shield (lease payment and initial fee) Tax shield (amortisation) sum COF kef* * D COF sum D COF k= D CF kun COF CFR Σ (1+ kg *fi = check k=1 • ef (1+ker * ef