DDX plc is trying to decide whether to lease or to buy a machine with a useful
Question:
DDX plc is trying to decide whether to lease or to buy a machine with a useful life of six years. DDX could borrow £90,000 to buy the machine or lease it for annual lease rentals of £20,000 per year for six years, payable at the start of each year. If the machine is bought, maintenance costs of £1,000 per year will be incurred. These costs will not be incurred if the machine is leased. The machine has zero scrap value. DDX pays tax at a rate of 19 per cent one year in arrears and can claim capital allowances on a 25 per cent reducing balance basis. The company’s before-tax cost of borrowing is 8.6 per cent. Should DDX lease or buy the machine?
Step by Step Answer:
As leasing is an alternative to borrowing the relevant cash flows of the two alternatives can be com...View the full answer
Corporate Finance Principles And Practice
ISBN: 9781292450940
9th Edition
Authors: Denzil Watson, Antony Head
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