Philix Ltd has decided to acquire a piece of equipment costing Shs 240 000 of five years. The equipment is expected to have no salvage value at the end and the company uses straight-line depreciation method on all it Fixed Assets. The company has two financing alternative methods available, leasing or borrowing. The loan has an interest rate of 15% requiring equal-year-end installments to be paid. The lease would be set at a level that would amortize the cost of equipment over the lease period and would provide the lessor with a 14% return on capital. The company's tax rate is 40%.

Required:

Compute the annual lease payments.

Compute the Present Value of the cash out flow under lease financing.

Calculate the annual loan installment payment.

Calculate the Present Value of after tax cash flow under the loan alternative.

Which alternative is better and why? (10mks)