A company is planning to acquire a machine costing K500,000. Effective life of the machine is 5 years. The company is co
Posted: Sun Apr 17, 2022 7:02 pm
A company is planning to acquire a machine costing K500,000.
Effective life of the machine is 5 years. The company is
considering two options. One is to acquire the machine through
leasing and the other is by borrowing K500,000 from its bankers at
10% p.a. simple interest. The principal amount of the loan will be
paid in 5 equal annual instalments. The machine will be sold at
K50,000 at the end of 5th year. The following is further
information: a) Principal, interest, lease rentals are payable on
the last day of each year. b) The machine will be fully depreciated
over its effective life. c) Tax rate is 30% and after tax cost of
capital is 8%.
REQUIRED: Compute the lease rentals payable which will make the
firm indifferent to the loan.
Effective life of the machine is 5 years. The company is
considering two options. One is to acquire the machine through
leasing and the other is by borrowing K500,000 from its bankers at
10% p.a. simple interest. The principal amount of the loan will be
paid in 5 equal annual instalments. The machine will be sold at
K50,000 at the end of 5th year. The following is further
information: a) Principal, interest, lease rentals are payable on
the last day of each year. b) The machine will be fully depreciated
over its effective life. c) Tax rate is 30% and after tax cost of
capital is 8%.
REQUIRED: Compute the lease rentals payable which will make the
firm indifferent to the loan.