Kindly assist with the following question. Thanks in advance QUESTION ONE A company has decided to acquire a K5 million
Posted: Sun Apr 17, 2022 7:00 pm
Kindly assist with the following question. Thanks in advance
QUESTION ONE
A company has decided to acquire a K5 million machine with a
useful life of 10 years. A subsidy of K500,000 is available at the
time the machine is acquired and put into service. The machine
would be depreciated on a straight –line basis and no salvage value
is expected. The company corporate tax is 50%. The acquisition
could be financed with a lease, with lease annual payments of
K550,000 required at the beginning of each year. Alternatively the
company can obtain a loan and purchase the machine at interest rate
of 10%. The loan is payable in equal instalments and the debt
payment would be due at the beginning of each year.
REQUIRED
I. What is the present value of cash outflow for each of the two
financing options, using the after-tax cost of debt?
II. Which of the two alternatives is preferable?
QUESTION ONE
A company has decided to acquire a K5 million machine with a
useful life of 10 years. A subsidy of K500,000 is available at the
time the machine is acquired and put into service. The machine
would be depreciated on a straight –line basis and no salvage value
is expected. The company corporate tax is 50%. The acquisition
could be financed with a lease, with lease annual payments of
K550,000 required at the beginning of each year. Alternatively the
company can obtain a loan and purchase the machine at interest rate
of 10%. The loan is payable in equal instalments and the debt
payment would be due at the beginning of each year.
REQUIRED
I. What is the present value of cash outflow for each of the two
financing options, using the after-tax cost of debt?
II. Which of the two alternatives is preferable?