A company is considering opening a new branch. The initial set-up cost including equipment is Sh. 1.7 million, Revenue will increase by Sh. 2 million and the cost of sales is 40% of revenue. Overhead cost is Sh. 150,000 per year. The company is considering leasing or buying the office space. The tax rate is 30% for all incomes.

Lease: The rent per year is Sh. 400,000 for ten-year lease term.

Buy: The purchase price is Sh. 2 million of which the cost of land is 20% of the purchase price. The building has a useful life of 20 years and is depreciated on a straight-line basis. The purchase will partly be financed by 10% interest only loan of Sh. 1.2 million due in 10 years. The property can be sold for Sh, 3.5 million at the end of year ten.

Required:

Should the company lease or buy? Show your workings. (25 marks)