High electricity costs have made farmers thrashing machine economically worthless. Only two machines in the market are available to replace it. The international thrashing machine (ITM) model is only available at lease basis. The lease payments will be Rs 80,000 for five years, due at begining of each year. This machine willl save farmers Rs 29,000 per year through reduction in electricity cost. As an alternative Farmmers can also purchase a more efficient machine (KBM) from krishi Bhavan in their locality for Rs 365,000. This machine will save Rs 32,000 per year in eelctricity costs. A Gramin bank has offered to finance the machine with loan amount of RS 365,000. Interest payment being 10% on the remaining balance and will reuiqre five annual principal payments of Rs 73,000. Farmer has a target debt to asset ratio of 67%. These farmers are in 34% tax bracket. After five years, both machines will be worhtlesss. These machines wil be debriciated on a straight line basis.

a. Should farmer lease ITM machine or purchase KBM machine from krishi bhavan?

b.Does your answer depend on the form of financing for direct purchase ?

c. How much debt is idsplaced bt this lease?