XYZ is in the business of manufacturing steel utensils. The firm is planning to
diversity and add a new product line. The firm either can buy the required machinery
or get it on lease.
The machine can be purchase for Rs. 15,00,000. It is expected to have a useful life
of 5 years with salvage value of Rs. 1,00,000 after the expiry of’ 5 years. The
purchase can be financed by 20 percent loan repayable in 5 equal annual
installments (inclusive of interest) becoming due at the end of each year.
Alternatively, the machine can be taken on year end lease rentals of Rs. 4,50,000 for
5 years. Advise the company, which option it should choose. For your exercise, you
may assume the following : (a) The machine will constitute a separate block for depreciation purposes. The
company follows written down value method of depreciation, the rate of
depreciation being 25 percent.
(b) Tax rate is 35 percent and cost of capital is 18 percent.
(c) Lease rents are to be paid at the end of the year.
(d) Maintenance expenses estimated at Rs. 30,000 per year are to be borne by the lessee.
diversity and add a new product line. The firm either can buy the required machinery
or get it on lease.
The machine can be purchase for Rs. 15,00,000. It is expected to have a useful life
of 5 years with salvage value of Rs. 1,00,000 after the expiry of’ 5 years. The
purchase can be financed by 20 percent loan repayable in 5 equal annual
installments (inclusive of interest) becoming due at the end of each year.
Alternatively, the machine can be taken on year end lease rentals of Rs. 4,50,000 for
5 years. Advise the company, which option it should choose. For your exercise, you
may assume the following : (a) The machine will constitute a separate block for depreciation purposes. The
company follows written down value method of depreciation, the rate of
depreciation being 25 percent.
(b) Tax rate is 35 percent and cost of capital is 18 percent.
(c) Lease rents are to be paid at the end of the year.
(d) Maintenance expenses estimated at Rs. 30,000 per year are to be borne by the lessee.