REQUIRED: Compute the lease rentals payable which will make the firm indifferent to the loan.
Mortgages
A mortgage is a formal agreement in which a bank or other financial institution lends cash at interest in return for assuming the title to the debtor's property, on the condition that the obligation is paid in full.
Mortgage
The term "mortgage" is a type of loan that a borrower takes to maintain his house or any form of assets and he agrees to return the amount in a particular period of time to the lender usually in a series of regular equally monthly, quarterly, or half-yearly payments.
A company is planning to acquire a machine costing K500,000. Effective life of the machine is 5 years.
The company is considering two options. One is to acquire the machine through leasing and the other is by borrowing K500,000 from its bankers at 10% p.a. simple interest.
The principal amount of the loan will be paid in 5 equal annual instalments. The machine will be sold at K50,000 at the end of 5th year.
The following is further information:
a) Principal, interest, lease rentals are payable on the last day of each year.
b) The machine will be fully
c) Tax rate is 30% and after tax cost of capital is 8%.
REQUIRED: Compute the lease rentals payable which will make the firm indifferent to the loan.
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