Dunsley Springs plc is looking to acquire a specialist drilling machine. The machine can be either bought for cash or leased and the company is looking into which of the two alternatives is the best way to acquire the machine.

Buying

If purchased, it would cost them costing m Dunsley would have to pay taxallowable maintenance costs of per year, payable at the end of each year. The purchase cost would be financed by debt finance. After five years, the machine will be sold on for an estimated The company can claim taxallowable depreciation of per year on a reducing balance basis.

Leasing

The machine could be leased for five years with annual lease rental payments of per year. Annual lease rentals would be payable at the start of each of the five years. All maintenance costs would be borne by the lessor.

The company has a beforetax cost of debt of per annum and pays corporation tax of per annum. The company is not in a taxexhaustive position.

 

 

Required:

a Using the information above, evaluate whether Dunsley Springs plc should lease or buy the drilling machine using appropriate net present value calculations.

Answer rating: 100% (QA)

To evaluate whether Dunsley Springs plc should lease or buy the drilling machine well calculate the net present value NPV for each option and compare ... View the full answer