A company intends to install a power saving machine and have option of buying or leasing. The company can obtain a loan at 14% payable in five equal instalments of K178,858 each, at the beginning of the year. In case of leasing, the company would require to pay an annual end of year rent of 25% of the cost of machine for 5 years. The company is in 40% tax bracket. The salvage value is estimated at K24,998 at the end of 5 years assuming straight line depreciation. Evaluate the two alternatives and advise the company by considering after tax cost of debt concept for both alternatives.
A company intends to install a power saving machine and have option of buying or leasing. The company can obtain a loan at 14% payable in five equal instalments of K178,858 each, at the beginning of the year. In case of leasing, the company would require to pay an annual end of year rent of 25% of the cost of machine for 5 years. The company is in 40% tax bracket. The salvage value is estimated at K24,998 at the end of 5 years assuming straight line depreciation. Evaluate the two alternatives and advise the company by considering after tax cost of debt concept for both alternatives.
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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A company intends to install a power saving machine and have option of buying or leasing. The company can obtain a loan at 14% payable in five equal instalments of K178,858 each, at the beginning of the year. In case of leasing, the company would require to pay an annual end of year rent of 25% of the cost of machine for 5 years. The company is in 40% tax bracket. The salvage value is estimated at K24,998 at the end of 5 years assuming straight line
Evaluate the two alternatives and advise the company by considering after tax cost of debt concept for both alternatives.
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