Fatima Fertilizer is thinking of replacing its existing machinery and two options are available. The German model is available but only on lease basis. The lease payments of this model are expected to be Rs. 80,000/- per year for 5 years and due at the beginning of each year. The model is expected to result in a before tax saving of Rs. 29,000/- per year due to electricity savings. The alternate model, which is more energy efficient will cost Rs. 365,000/- and will result in a before tax saving of Rs. 32,000/- per year. The purchased machine is depreciated at straight line method, and If purchased, the machine will be financed through HBL at 10%. The tax bracket for Fatima Fertilizer is 34%. The salvage value of both the machines will be 0 after five years. Should Fatima Fertilizer lease the German model or purchase the energy efficient machinery?

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