Soft Steel Bhd. is in the business of manufacturing steel utensils. The firm is planning to diversity and add a new product line. The firm can either buy the required machinery or get it on lease. The machine can be purchased for $15,000,000. It is expected to have a useful life of 5 years with salvage value of $1,000,000 after the expiry of 5 years. The purchase can be financed by 20 percent loan repayable in 5 equal annual instalments (inclusive of interest) becoming due at the end of each year. Alternatively, the machine can be taken on year-end lease rentals of $4,500,000 per annum for 5 years. You may assume the following:

(a) The company follows written down value method of depreciation, the rate of depreciation being 25 percent.

(b) Tax rate is 25 percent

(c) Cost of capital is 18 percent

(d) Lease rents are to be paid at the end of the year.

(e) Maintenance expenses estimated at $300,000 per year are to be borne by the lessee. 

Advice the company, which option it should choose.

Answer rating: 100% (QA)

SOLUTION Purchase Option Machine cost 15 million Loan amount 20 of 15m 3m Remaini... View the full answer