Turner plc is considering whether to buy a machine costing K100,000 through a three-year loan with interest at 14% per year. The machine would have zero scrap value at the end of it's three -year life. Alternatively, the machine could be leased for K320,000 per year, payable in arrears. Corporate tax is payable at 30 percent and capital allowances are available over the life of the machine on a 25% reducing balance basis. Calculate whether the company should lease or buy the machine.

Turner plc is considering whether to buy a machine costing K100,000 through a three-year loan with interest at 14% per year. The machine would have zero scrap value at the end of it's three -year life. Alternatively, the machine could be leased for K320,000 per year, payable in arrears. Corporate tax is payable at 30 percent and capital allowances are available over the life of the machine on a 25% reducing balance basis. Calculate whether the company should lease or buy the machine.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 17P: The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will...

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