Hypothetical limited is contemplating having access to a machine for a period of 5 years. Discussions with various financial institutions have shown that the company can have the use of machine for the stipulate period through leasing arrangement, or the requisite amount can be borrowed at 14 per cent to buy the machine. The firm is in the 50 percent tax bracket. In case of leasing, the firm would be required to pay an annual end-of year rent of Rs1,20,000 for 5 years. All maintenance, insurance and other costs are to be borne by the lessee.

In the case of purchase of the machine (which costs Rs 3,43,300), the firmwould have a 14 percent, 5-year loan, to be paid in 5 equal instalments, each instalment becoming due at the end of each year. The machine would be depreciated on a straight-line basis for tax purpose, with no salvage value.

Advise the company regarding the option it should go for, assuming lease rentals are paid (a)at the end of the year (b) in advance.