KBS International Plc has decided to purchase a new machine that costs 4.2 million. The machine...

 

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KBS International Plc has decided to purchase a new machine that costs 4.2 million. The machine will be depreciated on a 20 percent reducing balance basis and will be worth nothing at the end of 4 years. The corporate tax rate is 28 percent. The KCL bank has offered KBS International Plc a 4-year loan for 4.2 million. The repayment schedule is 4-yearly principal repayments of 1.05 million and an interest charge of 9 percent on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. AFM leasing Ltd offers to lease the same machine to KBS International Plc. Lease payments of 1.2 million per year are due at the beginning of each of the 4 years of the lease. Requirements: a) Should KBS International Plc lease the machine or buy it with bank financing? [20 marks] b) What is the annual lease payment that will make KBS International Plc indifferent to whether it leases the machine or purchases it. KBS International Plc has decided to purchase a new machine that costs 4.2 million. The machine will be depreciated on a 20 percent reducing balance basis and will be worth nothing at the end of 4 years. The corporate tax rate is 28 percent. The KCL bank has offered KBS International Plc a 4-year loan for 4.2 million. The repayment schedule is 4-yearly principal repayments of 1.05 million and an interest charge of 9 percent on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. AFM leasing Ltd offers to lease the same machine to KBS International Plc. Lease payments of 1.2 million per year are due at the beginning of each of the 4 years of the lease. Requirements: a) Should KBS International Plc lease the machine or buy it with bank financing? [20 marks] b) What is the annual lease payment that will make KBS International Plc indifferent to whether it leases the machine or purchases it.