Barrier Limited has decided to install a new machine in order to expand its operations. The company's management are considering leasing the machine from Latitude Finance or purchasing the machine using a bank loan. The cost of the machine fully installed is $1,900,000.

 

Lease finance offer:

• Lease payments of $500,000 p.a. payable in advance (at the beginning of each year)
• Term of the lease: 5 years
• Residual payment of $100,000 at the end of the lease term

 

Purchase outright:

• Depreciated at 20% p.a. using prime cost
• The interest rate on the loan will be 10%

 

Regardless of the financing option, the machine is expected to be sold at the end of five years for $200,000.

The company tax rate is 30% and tax is payable in the year of income.

 

Required:

a) Calculate the cash flow from leasing. 

b) Calculate the cash flow from buying. 

c) Recommend to the management of Barrier Limited which finance option they should choose.

d) Explain what the NAL results demonstrate, and how they can be utilised; after completing the NAL calculations.

Answer rating: 100% (QA)

a To work out the income from renting we really want to consider the yearly rent installments and the leftover installment toward the finish of the rent term Yearly rent installment 500000 payable ahe... View the full answer