Answer Happy

Question 12 Lancashire Mining is considering the purchase of a new driller costing a total of £5 million pounds. This furnace will qualify for accelerated depreciation: 25% can be expensed immediately, followed by 28%, 19.2%, 11.52%, 10 % and 6.28% over the next five years. Lancashire Mining is also considering the alternative of entering into lease contract for the driller. The lease term is five years, and the lease would qualify as a true tax lease. Lancashire's annual lease payments will be £1 million and the driller is worthless after five years. Lancashire estimates its marginal tax rate to be only 10% over the next five years and the company currently faces an 8% borrowing rate. 5 Please turn over REQUIRED: i) Calculate the Lease equivalent loan and show all your calculations. (4 marks) ii) Advise the company if they should buy or lease. Explain how much money they would be saving if they follow your advice. (3 marks)