Johara LTD needs to expand its facilities. To do so, the firm must acquire a machine costing RM80,000. The machine can be leased or purchased. The firm is in the 24% tax bracket, and its after tax cost of debt is 6.84%. The terms of lease and purchase plans are as follows.

Lease: The leasing arrangement requires BEGINNING of year payment of RM16,900 over five years. The lessee will exercise its option to buy the asset for RM12,000, to be paid along with the final lease payment.

Purchase: If the firm purchases the machine, its cost is RM80,000 and will be financed with a 5-year, 9% loan (pre-tax). The equipment is depreciated as heavy machinery and motor vehicles where the depreciation rates are attached in Appendix A. The machine will be depreciated using on a straight-line basis for 5 years.

QUESTIONS

a) Determine the after-cash outflow for Johara LTD under each alternative.

b) Find the present value of the after-tax cash outflow for each alternative using the after-tax cost of debt.

c) Which alternative, lease or purchase, would you recommend? Justify.