1:37 Instagram 4G < Back Topic 7 CLASS EXERCISE BF... CLASS EXERCISE BF1 080622 QUESTION ON LEASE VS PURCHASE Jackeel Textile Mills is an established textile manufacturer. As part of its plant modernization and cost reduction program, the management of Jackeel Textile Mills has decided to install a new automated weaving machine. The machine has an invoice price of RM250,000, including the delivery and installation charges. The funds needed would be borrowed from the bank through a 4-year amortized loan at a 10 per cent interest rate, with payments to be made at the end of each year. In the event that the machine is purchased, the manufacturer will contract to maintain and service it for a fee of RM20,000 per year paid at the end of the year. The machine falls in the MACRS 5- year class, and Jackeel's taxation rate is 40 per cent. The applicable MACRS rates are 0.20, 0.32, 0.19, 0.12, 0.11 and 0.06. Maju Automation Co., maker of the machine, has offered to lease the machine to Jackeel Textile for RM70,000 upon delivery and installation plus four additional annual lease payments of RM70,000 to be made at the end of each of the following years. The lease agreement includes maintenance and servicing. Actually, the loom has an expected life of 8 years, at which time its expected salvage value is zero; however, after four years, its market value is expected to equal its book value of RM42,500. Jackeel Textile plans to build an entirely new plant in four years, so it has no interest in either leasing or owning the proposed machine for more than that period. Required: a. Evaluate and advise Jackeel Textile Mills whether to lease machine? or to purchase the (15 marks) b. Discuss the possible reasons for Jackeel Textile Mills to lease rather than to buy the weaving machine. marks) (6