Flops Ltd manufactures sandals and wants to expand its product line. Management has

indicated that a new machine is required to manufacture a new line of brightly coloured

sandals. To purchase the machine, it has negotiated financing at a favourable before$-$tax cost

of $13\%$ interest per annum, with equal annual end$-$of$-$year instalments. Alternatively, the

company can enter into a direct financial lease with the manufacturer of the machine, which

means that the manufacturer will offer the machine and maintain it for its useful life at a cost

of R$150000$ per year, paid at the beginning of each year, for four years.

The machine costs R$700000$ and it is expected that it will require maintenance of R$80000$

per year, if bought. It is also expected that the machine can be sold for R$200000$ at the end

of its useful life of four years. The machine can be depreciated using the straight$-$line method

over a period of four years.

A tax rate of $27\%$ is applicable.

The company has a before$-$tax cost of debt of $13\%.$

REQUIRED:

Determine the net advantage of leasing and advise the company on the option they should

take based on your findings.