Question 1 INFORMATION: Lonmin Mining Ltd needs to acquire a new excavator costing R1 200 000. The excavator can be purchased or leased over a five year period. The company pays tax at 30%. The details of lease and purchase are as follows:

LEASE The lease agreement would require annual end of year instalments of R320 000 over the five years. Lonmin Mining Ltd will exercise its option to purchase the excavator for R100 000 at the end of the lease.

PURCHASE The cost of the excavator can be financed with a five-year loan with an interest rate of 10%. Maintenance costs of R60 000 will be paid every year. The straight line method of depreciation is used.

Prepare a comparison of the cash flows associated with leasing versus borrowing and buying the asset.

Leasing

Borrow and buy

End of year	After tax cash outflow	PVIF	Present Value of outflows	After tax Cash outflow	PVIF	Present value of outflows
1
2
3
4
5