You are hired as an analyst for Engro Corporation. During your first assignment, you are asked to perform a buy versus lease analysis on a newly developed machine. The machine cost Rs. 1,200,000 and if Engro decide to purchase it, a term loan can be obtained at a cost of 10%. The amount of the loan will be amortized in 4-year machine life (
You are hired as an analyst for Engro Corporation. During your first assignment, you are asked to perform a buy versus lease analysis on a newly developed machine. The machine cost Rs. 1,200,000 and if Engro decide to purchase it, a term loan can be obtained at a cost of 10%. The amount of the loan will be amortized in 4-year machine life (with the payments made at the end of each year). This is the special purpose machine and falls into MACRS 3-year class for
Because of rapid changes in technology and uncertainty around residual value, a useful alternate is to arrange this machine through leasing. Orix leasing company has shown interest to give the machine at a 4-year lease, including its maintenance, for a total payment of Rs. 340,000 at the beginning of each year. Engro’s federal tax rate is 40%. The management has asked you to help by answering the following questions.
- Calculate the Engro’s
present value cost of owning the machine (Hint: Calculate the present value of all the cashflows from year 0 to year 4). Explain the logic for the discount rate you used to find the PV. - What is Engro’s present value cost of leasing the Machine? (Hint: Again, repeat what you did in case of owning the machine in part a). Is there any net advantage to leasing? Should Engro buy or lease the Machine? Explain
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