Morris-Meyer mining company must install sh.1.5 million of new machinery in its Nevada plant. It can obtain a bank loan for 100 percent of the required amount. Alternatively, a Nevada investment banking firm that represents a group of investors believe that it can arrange for a lease financing plan. Assume that the following facts apply;

The equipment is depreciated on a straight line basis

Estimated maintenance expenses are sh.75,000 per annum

Morris-Meyers corporate tax rate is 30%

If the money is borrowed, the bank loan will be at a rate of 15%, amortized in four equal instalments to be paid at the end of each year.

The tentative lease terms call for end of year lease rental payments of sh;400,000 per year for 4 years

Under the proposed lease terms, the lease must pay for insurance, property taxes and maintenance cost

Morris-Meyer must use the equipment if if is to continue in business, so it will almost certainly want to acquire the property at the end of the lease. If it does, then under the lease terms, it can purchase the machinery at its fair market value at that time. The best estimate of this market value is the sh.250, 000 salvage value, but it could be much higher or lower under certain circumstances.

Required

A loan amortization schedule if money is borrowed to acquire the machinery

Should Morris-Meyer lease or borrow and buy the equipment? Explain