A company intends to acquire a machine. The price of the machine is K600,000. The company can borrow this amount from a commercial bank at 12% simple interest per annum to finance the purchase. The principal sum is to be paid in 5 equal year-end instalments.

The company has option to lease the machine for 5 years.

The company seeks your advice to know the maximum lease rent payable at each year end.

Consider the following additional information:

1. Interest on bank loan is payable at each year end.
2. The full cost of the machine will be written of over the effective life of the machine on a straight-line basis. This is allowed for tax purposes.
3. At the end of year 5, the machine may be sold for K1,500 through a second-hand dealer, who will charge 8% commission on the sale proceeds.
4. The companys effective tax rate is 30%.
5. The cost of capital is 11%

Suggest the maximum lease rental for the company.