Eastern Platinum Limited plans to acquire new plant and machinery for its mining operations in Limpopo. The company is deciding whether to purchase or lease the plant and machinery. The following information has been provided:

 

PURCHASE The plant and machinery can be purchased at a cost of R2 200 000. The machine will have a five-year useful life and will be written down to a NIL book value. A loan can be taken to be repaid over the five years at an interest rate of 10%. Maintenance costs of R80 000 will be incurred at the end of every year. The company policy is to depreciate assets on a straight-line basis over the useful life of the asset.

 

LEASE The plant and machinery can be leased for five years for an annual lease payment of R580 000. The company will exercise its option to acquire the machinery at the end of the lease period for an amount of R100 000.

 

The company is subject to a tax rate of 30%.

 

REQUIRED:

Using the net advantage of leasing (NAL) method calculate the following:

3.1  Amortisation schedule showing the interest and principal of the loan. 

3.2 The after tax cash outflows associated with borrowing and buying the asset.

3.3 A comparison of cash flows associated with leasing versus borrowing and buying the asset.

3.4 Which alternative would you recommend? Why