Lonmin Mining Ltd needs to acquire a new excavator costing R1 200 000. The excavator can be purchased or leased over a
five year period. The company pays tax at 30%. The details of lease and purchase are as follows:

LEASE
The lease agreement would require annual end of year instalments of R320 000 over the five years. Lonmin Mining Ltd will
exercise its option to purchase the excavator for R100 000 at the end of the lease.

PURCHASE
The cost of the excavator can be financed with a five-year loan with an interest rate of 10%. Maintenance costs of R60 000
will be paid every year. The straight line method of depreciation is used.

1.1 Calculate an amortization schedule showing the interest and principal of the loan.

1.2 Calculate the after tax cash outflows associated with borrowing and buying the asset.

1.3Prepare a comparison of the cash flows associated with leasing versus borrowing and buying the
asset.

1.4 Which alternative would you recommend? Why?

Answer rating: 100% (QA)

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