Ion Ltd has decided to expand its production capacity by going for new machinery costing Rs. 60 million and it is considering two alternatives:

(i) borrowing and purchasing the plant, or

(ii) leasing the plant

Hyoerion Ltd is willing to lease the plant to Ion Ltd for an annual lease rental of Rs.12.2 million for 5 years, the lease rental being payable in arrears.

The tax relevant depreciation rate on the plant is 20 % as per the Straight line method. There is no salvage value.

Ion Ltd has an effective tax rate of 35 % and its post- tax cost of debt is 7 %.

What is the net advantage of leasing (NAL) for Ion Ltd? What is your final decision? Provide suitable explanations for your choices.