ABC Company is in the business of manufacturing steel utensils. The firm is planning to diversify and add a new product line. The firm either can buy the required machinery or get it on lease. The machine can be purchased for Rs. 1.5 million. It is expected to have a useful life of 5 year with a salvage value of 0.1 million after the expiry of five years. The purchase can be financed by a loan of 20 percent interest repayable at the end of each year. Alternatively, the machine can be taken on year end lease rentals of Rs. 450,000 for five years. Advice the company on the option it should choose. For your exercise you may assume the following:

a. The machine will constitute a separate block for depreciation purposes. The company follows straight line depreciation method.

b. Tax rate is 35 percent and cost of capital is 20 percent.

c. Lease rentals are to be paid at the end of year.

d. Maintenance expenses estimated at Rs. 30,000 per year are to be borne by the lessee.

e. Assume the firm would have sufficient short-term capital gains in the year of sale of machine.