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QUESTION $4$

$(30$ Marks$)$

Management, wants to increase business productury, necessitating the purchase of equipment to the value of R$7$SO $000.$ The company can finance the equipment either aith a fiveyear loan at an interest rate of $10\%.$ or can enter into a fluance lease. Finance lease payments of R$195000$ per year, payable in arrears, will need to be made for a period of five years If the asset is leased.

The company depreciates equipment on a straight$-$Ine method over a period of five years, which agrees with the wear$-$and$-$tear allowance allowed by SARS. Equipment beas a $10\%$ residual value.

Irrespective of the financing option, the company will be responsble for martaining the equipment at a cost of R$40000$ per year, from year two. The currert tax rate is $27\%$ and is payalie in the year in which it is incurred. SARS allows interest, lease and maritenance costs to be deducled for tax purposes.

Required:

$4\mathrm{.}1.$ Assess whether management should take out a loan is finance the equipment, or should consider a finance leased asset contractual oblication.

$(25$ Marks$)$