Answered step by step
Verified Expert Solution
Link Copied!

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:

  1. Interest on bank loans is payable at each year-end.

  2. 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.
  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 company’s effective tax rate is 30%.
  5. The cost of capital is 11%.

  6. 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 ... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Valuation Measuring and managing the values of companies

Authors: Mckinsey, Tim Koller, Marc Goedhart, David Wessel

5th edition

978-0470424650, 9780470889930, 470424656, 470889934, 978-047042470

More Books

Students also viewed these Corporate Finance questions

Question

Which subject does Corporate social responsibility belong to?

Answered: 1 week ago

Question

=+ What are the undesirable consequences?

Answered: 1 week ago