A firm is planning to manufacture some new products for which it needs a new machine.

 The firm can get this machine either on Lease or on Hire Purchase. Machine cost- Rs. 50 lakhs Depreciation Rate – 25% on WDV basis , Cost of capital and cost of Debt are 16% and 20% respectively Tax rate – 30% 

Hire Purchase plan – Flat rate of interest at which Hire-Purchase is available is 16% Repayment has to be made in 3 equated annual installments in advance.20% Down payment is required Lease Plan – Lease rentals are payable at Rs. 200/1000 annually in advance. Lease period is for 5 years. 

Assume SOYD method for allocation of total charge for credit under Hire-Purchase. Net Salvage value after 3 years is Rs.10 lakhs. 

Should the firm go for Leasing or for Hire-Purchase?