NZ Ltd has decided to install a new item of plant, which will cost $500,000. The following
Question:
NZ Ltd has decided to install a new item of plant, which will cost $500,000. The following alternative financing arrangements are available:
Purchasing finance by borrowing | |
Amount borrowed | $500,000 |
Term of loan | 5 years |
Interest rate | 9.7% payable annually |
Lease plan | |
Amount of finance | $500,000 |
Term | 5 years |
True interest rate | 9.1% |
Annual instalments | $128,880 |
Additional information
The tax rate is 28%. Assume that tax benefits arising from deductible expenditures are received in the year of the expenditure. NZ Ltd uses the after-tax borrowing rate as a discount rate.
Which financing option should NZ Ltd choose?
Show your calculations of the cost of each financing option. Use whole numbers when rounding.
Expert Answer:
Loan Amount Barrowed 500000 Term Loan of 5 years interest Rate 97 Per Anum Tax ... View the full answer
Process Dynamics And Control
ISBN: 978-0471000778
2nd Edition
Authors: Dale E. Seborg, Thomas F. Edgar, Duncan A. Mellich
