Question 7 Encik Khai Bahar, the Hyundoi Holding Berhad's president, need an equipment to expand his business.
Question:
Question 7
Encik Khai Bahar, the Hyundoi Holding Berhad's president, need an equipment to expand his business. Sulama Equipment Berhad has offered to sell Hyundoi Holding Berhad the necessary equipment at a price of RM100,000. It will be completely obsolete in five years and the estimated salvage value is RM10,000. If Encik Khai Bahar purchases the equipment, it will be depreciated using straight-line for five years.
Alternatively, the company can lease the equipment from Subaru Leasing Enterprise. The lease contract calls for five annual payment of RM30,000 per year, payable at the beginning of the year. Additionally, Hyundoi Holding Berhad must make a security deposit of RM3,000 that will be returned when the lease expires.
The company options are to borrow the money at 20% to buy the equipment from Sulama Equipment Berhad or to lease it from Subaru Leasing Enterprise. The company has a marginal tax rate of 30%.
From the above information you are required to answer the questions below.
- Discuss TWO (2) benefits of leasing to Encik Khai Bahar. (4 Marks)
- Recommend Encik Khai Bahar whether he should purchase or lease the equipment. (6 Marks)
(Total: 10 Marks)
Question 8
Seungri Berhad wishes to evaluate the following two alternatives available to acquire a machine.
Lease Alternative
Seungri Berhad can lease the machine under a 5-year lease requiring lease payment of RM5,000 at the end of each year. All maintenance costs will be borne by the lessor and the insurance and other costs will be borne by the lessee.
"Borrowing to Buy" Alternative
The machine costs RM20,000 and will have a 5-year life. The purchase will be financed by a 5-year, 15% interest. Seungri Berhad will pay RM1,000 per year for a service contract that covers all maintenance costs; insurance and other costs will also be met by Seungri Berhad.
Seungri Berhad plans to keep the machine and use it beyond its 5-year life.
The machine will be depreciated as given below:
| Year | Depreciation RM |
| 1 | 4,000 |
| 2 | 6,400 |
| 3 | 3,800 |
| 4 | 2,400 |
| 5 | 2,400 |
Given that the corporate tax rate is 30%.
From the above information you are required to answer the questions below.
Should Seungri Berhad acquire the machine on lease or buy? Show your workings. (10 Marks)
Expert Answer:
