10 Leasing versus purchase. Rembrandt Reprographics, a specialist printing and publications design company, has decided to acquire state-of-the-art printing and reprographics equipment at a purchase cost of £80,000. The equipment is expected to be usable for 5 years, after which time it could be disposed of for an estimated

£5,000. The ABC Finance Company has approached Rembrandt offering leasing terms of £19,000 per year over the five-year period.

If the equipment is purchased outright the company can claim appropriate capital allowances of 25 per cent on a reducing balance basis, but will need to spend approximately £1,000 per year on servicing and repairs.

Assuming corporation tax is at 30 per cent and that the company’s before tax cost of debt is 17 per cent, determine whether leasing or outright purchase would be the more cost-effective option. You may also assume that Rembrandt is a very profitable company with adequate borrowing capacity.