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Z plc Company wants to acquire a new machine costing 6 million. It has an expected operating life of 3 years, with a scrap value of 250,000 at the end of its life. Maintenance costs for the machine will be 300,000 per year.

Z plc can acquire the machine on a 3-year operating lease for lease payments of 1.6 million per year, paid annually in advance. Alternatively, the machine can be acquired on a 3-year financial lease for lease payments of 1.2 million per year, paid annually in advance.

Z plc pays tax at 19%, 12 months in arrears. The companys after-tax loan interest rate is 10%.

Required:

Evaluate whether it is cheaper for Z plc to acquire the machine on an operating lease or on a financial lease.( Your workings should be to the nearest m)