Puan Siti Payung, the Jasminum Computers Berhads president, is in a middle of making decision on buying a big photostat machine. Tuberso Equipment Berhad has offered to sell Jasminum Computers Berhad the necessary machine at a price of RM80,000. It will be completely obsolete in five years and the estimated salvage value is RM8,000. If Puan Siti Payung purchases the machine, it will be depreciated using straight-line for five years.

Alternatively, the company can lease the machine from Ironless Leasing Enterprise. The lease contract calls for five annual payment of RM18,000 per year. Additionally, Jasminum Computers Berhad must make a security deposit of RM 3,800 that will be returned when the lease expires. Jasminum Computers Berhad will pay RM1,800 per year for a service contract that covers all maintenance costs; insurance and other costs will also be met by Jasminum Computers Berhad.

The company options are to borrow the money at 18% to buy the machine from Tuberso Equipment Berhad or to lease it from Ironless Leasing Enterprise. The company has a marginal tax rate of 25%.

From the above information you are required to answer the questions below.

1. Briefly explain TWO (2) benefits of leasing to Puan Siti Payung. (4 Marks)

2. Recommend Puan Siti Payung whether she should purchase or lease the machine. (6 Marks)