ABC Ltd. is contemplating have an access to a machine for a period of 5 years. The
Question:
ABC Ltd. is contemplating have an access to a machine for a period of 5 years. The company can have use of the machine for the stipulated period through leasing arrangement or the requisite amount can be borrowed to buy the machine. In case of leasing, the company received a proposal to pay annual end of year rent of $240,000 for a period of 5 years.
In case of purchase (which cost $1000,000) the company would have a 12%, 5 years loan to be paid in equated installments, each installment becoming due to the beginning of each years. It is estimated that the machine can be sold for $200,000 at the end of 5th year. The company used straight line method of depreciation. Corporate tax rate is 30%. Post tax cost of capital of ABC is 10%.
You are required to advise: Whether the machine should be bought or taken on lease.