ABC Itd is considering acquiring a new machine to its production plant to minimize the

wastage. The machine would cost Rs. 6.4 mn and would have an economic life of five years

The machine will reduce operating costs of the firm by Rs. 2.5 mn per annum. Capital

allowance of 25% p.a on a straight-line basis is available for the investment. Taxation at 359

is payable one year in arrears. It is considered that a discount rate of 20% would reflect the

risk of the project's operating cash flows. The firm has two alternatives to finance the new

plant. One is by means of a five-year fixed interest loan at 18% p.a, principal payable in fiVe

wear time. As an alternative a leasing company has offered a finance lease over five years at

Rs. 1.5 mn per year payable in advance. Scrap value of the machine under financing

alternative will be zero.

Determine the alternative to be taken by the company.