QUESTION 1

Amalgamated Regional Trading Corporation needs to upgrade its production machinery. A suitable machinery costs R240 000. The computer system can be leased or purchased. The terms of the lease and purchases agreement are as follows:

Lease: The lease would require annual end-of -year payments of R70 400 over the four years. Maintenance cost of R9 500 per annum will be paid by the lessee. The lessee will also purchase the asset for R29 000 at the termination of the lease.

Purchase: The cost could be financed with Highveld Financial Services Ltd. It would require a four-year 16 % loan, with annual year-end payments of R85 770. Amalgamated Regional Trading Corporation will pay insurance and maintenance cost of R12 000 per annum. At the end of the period the equipment will be sold at its scrap value of R22 000. The straight-line depreciation method is used. Interest payments for the respective four-years are R38 400; R30 820; R20 028 and R11 830.

Additional information: * The company is in the 30 % tax bracket.