QUESTION $3$

$(20$ Marks$)$

INFORMATION

Anglo Limited has decided to acquire a new machine to increase its production capacity. It is now faced with the decision whether to purchase or lease the machine. The following information relates to each option under consideration:

PURCHASE

The machine can be purchased for R $1600000.$ A bank loan for the entire amount can be laken payable over $5$ years with an interest rate of $10\%.$ Maintenance costs of R$90000$ per year are expected to be incurred.

LEASE

The machine can be leased for a$-$five$-$year period with annual lease payments amounting to R$470000.$ At the end of the lease period the company will have an option to acquire ownership of the machine for a payment of R$100000.$ It intends exercising this option.

The company tax rate is $30\%.$

Machinery is depreciated on a straight$-$line basis over its useful life.

REQUIRED:

$3\mathrm{.}1$ Compile the amortisation table for the loan.

$(6$ marks$)$

$3\mathrm{.}2$ Calculate the after$-$tax cash outflows related to borrowing and buying the machine.

$(6$ marks$)$

$3\mathrm{.}3$ Compare the after$-$tax cash outflows of the leasing and purchasing option.

$(6$ marks$)$

$3\mathrm{.}4$ Which option should the company exercise?

$(2$ marks$)$