A company intends to acquire a machine. The price of the machine is K600,000. The company can borrow this amount from a commercial bank at 12% simple interest per annum to finance the purchase. The principal sum is to be paid in 5 equal year-end installments.

The company has option to lease the machine for 5 years.

The company seeks your advice to know the maximum lease rent payable at each year-end.

Consider the following additional information:

1. Interest on bank loans is payable at each year-end.
2. 
   
3. The full cost of the machine will be written off over the effective life of the machine on a straight-line basis. This is allowed for tax purposes.
4. At the end of year 5, the machine may be sold for K1,500 through a second-hand dealer, who will charge 8% commission on the sale proceeds.
5. The company’s effective tax rate is 30%.
6. The cost of capital is 11%.
7. 
   
8. Suggest the maximum lease rental for the company.

Answer rating: 100% (QA)

Maximum lease rental for the company is 180172 Answer Calculating break even lease rental ... View the full answer