Puan Sri Tanjung, the Jasminum Computers Berhad's president, is in the middle of making a decision on buying a big photostat machine. Tuberso Equipment Berhad has offered to sell Jasminum Computers Berhad the necessary machine at a price of RM80,000. It will be completely obsolete in five years and the estimated salvage value is RM8,000. If Puan Sri Tanjung purchases the machine, it will be depreciated using straight-line for five years.

Alternatively, the company can lease the machine from Ironless Leasing Enterprise. The lease contract calls for five annual payment of RM18,000 per year. Additionally, Jasminum Computers Berhad must make a security deposit of RM3,800 that will be returned when the lease expires. Jasminum Computers Berhad will pay RM1,800 per year for a service contract that covers all maintenance costs; insurance and other costs will also be met by Jasminum Computers Berhad.

The company options are to borrow the money at 18% to buy the machine from Tuberso Equipment Berhad or to lease it from Ironless Leasing Enterprise.  The company has a marginal tax rate of 28%.

You are required to Answer the Questions below.

a. Prepare the Cash Flows Analysis by showing clearly the Net Advantage of Leasing (NAL).                                                                 

b. Based on NAL in part (a), should Puan Sri Tanjung lease or purchase the photostat machine? Explain your answer?

Answer rating: 100% (QA)

a if assets purchased Cost of the machine RM 80000 Depreciations per annum RM 16000 Tax she... View the full answer