Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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
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 installments.
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:
- Interest on bank loans is payable at each year-end.
- The full cost of the machine will be written off over the effective life of the machine on a straight-line basis. This is allowed for tax purposes.
- 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.
- The company’s effective tax rate is 30%.
- The cost of capital is 11%.
- Suggest the maximum lease rental for the company.
Step by Step Solution
★★★★★
3.41 Rating (148 Votes )
There are 3 Steps involved in it
Step: 1
Maximum lease rental for the company is 180172 Answer Calculating break even lease rental ...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started