Question
Majengo Company is contemplating to acquire an equipment costing Tshs. 6,000,000. The equipment is expecting to have a useful life of 5 years. It will
Majengo Company is contemplating to acquire an equipment costing Tshs. 6,000,000. The equipment is expecting to have a useful life of 5 years. It will be depreciated by a straight line method to zero salvage value. The Company has two alternatives of acquiring the equipment: i.e. buying it or leasing it. If it decides to lease it, it would be required to pay a lease rent of Tshs. 2,000,000 per year at every end of the year. If the Company decides to buy it, it will acquire a loan at a 20% interest rate payable in 5 equal instalments at the end of each year. The company is in 50% tax bracket. Required: Advice Majengo Company on the best alternative it should take.
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