Question 10

AGD Co is a profitable company which is considering the purchase of a machine costing GHS320 million. If purchased, AGD Co would incur annual maintenance costs of GHS25 million. The machine would be used for the three years and at the end of this period would be sold for GHS50 million. Alternatively, the machine could be obtained under an operating lease for an annual lease rental of GHS120 million per year, payable in advance. AGD Co can claim capital allowances on a 25% reducing balance basis. The company pays tax on profits at an annual rate of 30% and all tax liabilities are paid one year in arrears. AGD Co has an accounting year that ends on 31 December. If the machine is purchased, payment will be made in January of the first year of operation. If leased, annual lease rentals will be paid in January of each year of operation.

Using an after-tax borrowing rate of 7%, evaluate whether AGD Co should purchase or lease the new machine.

Question 10

AGD Co is a profitable company which is considering the purchase of a machine costing GHS320 million. If purchased, AGD Co would incur annual maintenance costs of GHS25 million. The machine would be used for the three years and at the end of this period would be sold for GHS50 million. Alternatively, the machine could be obtained under an operating lease for an annual lease rental of GHS120 million per year, payable in advance. AGD Co can claim capital allowances on a 25% reducing balance basis. The company pays tax on profits at an annual rate of 30% and all tax liabilities are paid one year in arrears. AGD Co has an accounting year that ends on 31 December. If the machine is purchased, payment will be made in January of the first year of operation. If leased, annual lease rentals will be paid in January of each year of operation.

Using an after-tax borrowing rate of 7%, evaluate whether AGD Co should purchase or lease the new machine.