1. Grand Mind Ltd., is in the business of manufacturing steel utensils. The firm is planning to diversify and add a new product line. The company require a machinery and can either purchase or get it on lease basis .

The machine can be purchased for $15,000,000. It is expected to have a useful life of 5 years with salvage value of $1,000,000 after 5 years. The purchase can be financed by a 20 percent loan repayable in 5 equal annual instalments ( inclusive of interest) becoming due at the end of each year. Alternatively, the machine can be taken on year-end lease rentals of $4,500,000 for 5 years. You may assume the following:

(a) The company follows written down value method of depreciation, the rate of depreciation being 25 percent.

(b) Tax rate is at 25 % and cost of capital is 18 percent

(c) Lease rents are to be paid at the end of the year.

(d) Maintenance expenses is estimated at $ 300,000 per year to be borne by the lessee.

Required

Advice the company, which option it should choose.