A company intends to install a power saving machine and have option of buying or leasing. The company can obtain a loan
Posted: Sun Apr 17, 2022 7:02 pm
A company intends to install a power saving machine and have
option of buying or leasing. The company can obtain a loan at 14%
payable in five equal instalments of K178,858 each, at the
beginning of the year. In case of leasing, the company would
require to pay an annual end of year rent of 25% of the cost of
machine for 5 years. The company is in 40% tax bracket. The salvage
value is estimated at K24,998 at the end of 5 years assuming
straight line depreciation.
Evaluate the two alternatives and advise the company by
considering after tax cost of debt concept for both
alternatives.
option of buying or leasing. The company can obtain a loan at 14%
payable in five equal instalments of K178,858 each, at the
beginning of the year. In case of leasing, the company would
require to pay an annual end of year rent of 25% of the cost of
machine for 5 years. The company is in 40% tax bracket. The salvage
value is estimated at K24,998 at the end of 5 years assuming
straight line depreciation.
Evaluate the two alternatives and advise the company by
considering after tax cost of debt concept for both
alternatives.