Question 1 Seroja Berhad (Seroja) wishes to evaluate the following two alternatives available to acquire a machine: Lease Alternative Seroja can lease the machine under a 5-year lease requiring lease payment of RM5,000 at the beginning 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. Seroja will pay RM1,000 per year for a service contract that covers insurance and other costs. Seroja 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 5,000 2 4,000 3 3,000 4 2,000 5 1,000 Given that the corporate tax rate is 30%. From the above information you are required to answer the following questions. a. Give explanation to Seroja on ONE (1) benefit of leasing. b. Prepare the Cash Flows Analysis by clearly showing the Net Advantage of Leasing (NAL). c. Based on NAL in part (a), should Seroja lease or purchase the machine? Explain your answer.
Question 1 Seroja Berhad (Seroja) wishes to evaluate the following two alternatives available to acquire a machine: Lease Alternative Seroja can lease the machine under a 5-year lease requiring lease payment of RM5,000 at the beginning 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. Seroja will pay RM1,000 per year for a service contract that covers insurance and other costs. Seroja 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 5,000 2 4,000 3 3,000 4 2,000 5 1,000 Given that the corporate tax rate is 30%. From the above information you are required to answer the following questions. a. Give explanation to Seroja on ONE (1) benefit of leasing. b. Prepare the Cash Flows Analysis by clearly showing the Net Advantage of Leasing (NAL). c. Based on NAL in part (a), should Seroja lease or purchase the machine? Explain your answer.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text:Question 1
Seroja Berhad (Seroja) wishes to evaluate the following two alternatives available to acquire a
machine:
Lease Alternative
Seroja can lease the machine under a 5-year lease requiring lease payment of RM5,000 at the
beginning 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. Seroja will pay RM1,000 per year for a service contract that covers insurance
and other costs.
Seroja 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
5,000
2
4,000
3
3,000
4
2,000
5
1,000
Given that the corporate tax rate is 30%.
From the above information you are required to answer the following questions.
a. Give explanation to Seroja on ONE (1) benefit of leasing.
b. Prepare the Cash Flows Analysis by clearly showing the Net Advantage of Leasing (NAL).
c. Based on NAL in part (a), should Seroja lease or purchase the machine? Explain your answer.
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