QUESTION TWO Company requires the use of a machine with the options of buying or leasing. The cost of the machine is K20
Posted: Sun Apr 17, 2022 7:00 pm
QUESTION TWO
Company requires the use of a machine with the options of buying
or leasing. The cost of the machine is K20 million and has a useful
life of 5 year with salvage value of K4 million (consider
short-term capital loss/gain for the income tax). Option 1: obtain
a loan at 20% repayable in five equal instalments and repayments
falling due at the end of each year. Option 2: lease the machine
for five years with year-end lease payments of K6 million per
annum. Use decline balance depreciation method at 25%. Company tax
is 35% and the cost of capital is 14%.
REQUIIRED
I. Advise the company which option it should choose – lease or
borrow.
II. Asses the proposal from the lessor’s point of view examining
whether leasing the machine is financially viable at 14% cost of
capital.
Company requires the use of a machine with the options of buying
or leasing. The cost of the machine is K20 million and has a useful
life of 5 year with salvage value of K4 million (consider
short-term capital loss/gain for the income tax). Option 1: obtain
a loan at 20% repayable in five equal instalments and repayments
falling due at the end of each year. Option 2: lease the machine
for five years with year-end lease payments of K6 million per
annum. Use decline balance depreciation method at 25%. Company tax
is 35% and the cost of capital is 14%.
REQUIIRED
I. Advise the company which option it should choose – lease or
borrow.
II. Asses the proposal from the lessor’s point of view examining
whether leasing the machine is financially viable at 14% cost of
capital.