An Industrial unit desires to acquire a diesel generating set costing Rs.20,00,000 which has an economic life of 10 years at the end of which the asset is not expected to have any residual value. 

The unit is considering two alternative choices of

(a) taking the machinery on lease, or 

(b) buying it outright on Loan. 

Lease rentals of Rs.2,95,902 annually are to be made in advance and the lessor requires the asset to be completely amortized over its useful period. The rate of interest on loan is 16% per annum. The lender requires the loan to be re-paid in 10 equal annual installments becoming due at the beginning of the first year. Average rate of income tax is 40%. It is expected that the operating costs would remain the same under either method. The firm follows straight line method of depreciation and the same is accepted for tax purposes. 

As a financial consultant, advice which option is better?

Answer rating: 100% (QA)

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