A firm is planning to manufacture some new products for which it needs a new machine. The

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Question:

A firm is planning to manufacture some new products for which it needs a new machine.

The firm can get this machine either on Lease or on Hire Purchase. Machine cost- Rs. 50 lakhs Depreciation Rate – 25% on WDV basis , Cost of capital and cost of Debt are 16% and 20% respectively Tax rate – 30%

Hire Purchase plan – Flat rate of interest at which Hire-Purchase is available is 16% Repayment has to be made in 3 equated annual installments in advance.20% Down payment is required Lease Plan – Lease rentals are payable at Rs. 200/1000 annually in advance. Lease period is for 5 years.

Assume SOYD method for allocation of total charge for credit under Hire-Purchase. Net Salvage value after 3 years is Rs.10 lakhs.

Should the firm go for Leasing or for Hire-Purchase?