ABC Ltd has decided to acquire a piece of equipment costing Kshs 240’000 useful live five years .The equipment is expected to have no salvage value at the end of the five years and the company uses straight line depreciation method on all its fixed assets.The company has two financing alternatives methods available, leasing and Borrowing.The loan has an interest rate of 15% requiring equal year end installments to be paid.the lease would be set to a level that would amortize the cost of the equipment over the lease period and would provide the lessor with a 14% return on capital.The companys tax rate is 40%. 

Required: 

a) Compute the annual lease payments (3 marks )

b) Compute the PV of the cash outflow under lease financing. (5 marks) 

c) Calculate the annual loan installment payment. (3 marks) 

d) For eachof the 5 years ,calculate the interest and the principle component of the loan repayment. (4 marks) 

e) Calculate the PV of after tax cash flow under the loan alternative.(7marks) 

f) Which alternative is better and why? (3 marks) 

Answer rating: 100% (QA)

a Annual lease payments Equipment cost PVACF 14 ie lease rat... View the full answer