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Leasing Versus Purchase (Loan) company ABC Sdn Bhd is in the midst to decide whether to lease or to purchase a new machine with a
Leasing Versus Purchase (Loan) company ABC Sdn Bhd is in the midst to decide whether to lease or to purchase a new machine with a useful life of 6 years. ABC Sdn Bhd could get a loan from BBB Bank for RM 185,000 to buy the machine. or it could lease the machine from CCC Sdn Bhd for an annual rental of RM 40,000 per year for 6 years, payable in advance (at the start of each year). If the ABC purchases the machine, there will be a maintenance cost of RM 2100 per annum. While if the machine is leased, these costs will not be incurred. ABC Sdn Bhd pays corporate tax at a rate of 30% one year in arrears and can claim capital allowances on a 20% straight-line basis. The firm's before-tax cost of borrowing is 9%. Required: Should you suggest ABC Sdn Bhd to lease or buy the machine? Justify your choice
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