QUESTION 3 As part of its modernisation and automation programme, Peppermint Sdn. Bhd. has decided to install a new automated machine for its manufacturing process. The management of the company is considering whether to take a loan and purchase the machine, or to enter into a lease agreement The machine has an invoice price of RM620,000. In addition, the company has to pay RM80,000 for delivery and installation. The company can get the funds from the bank through a four-year amortised loan at a 10% interest rate, with payments to be made at the end of each year. If the machine is purchased, the company can claim capital allowance (i.c. tax depreciation) of 40% on cost in the first year, and 20% on cost in year two year three and year four. Besides, a maintenance fee of RM10,000 per year will be incurred at the end of each year. Alternatively, the supplier of the machine has offered to lease the machine to Peppermint at annual lease payment of RM180,000 over four-year period, payable at the beginning of the year. The lessor will bear the maintenance fee. However, the company has to pay the cost of delivery and installation (same amount as under the purchase option). No capital allowance is available for leased asset. At the end of the lease period, the machine will be returned to the supplier The machine has an expected useful life of ten years. However, Peppermint plans to replace the machine after four years so it can always use the latest technology available in the market. The expected residual value of the machine at the end of the fourth year is RM30,000. Any profit from the disposal is taxable, and any loss is tax deductible. The income tax rate applicable for the company is 24%. Interest on loan and revenue expenditure are deductible for tax purpose. The company's cost of capital is 15%. Required: a) Produce amortisation table for the bank loan taken to finance the purchase of the machine. (4 marks) b) Based on the net present value of each cash outflow stream of purchase option and lease option, should Peppermint purchase or lease the machine? Round your answer to the nearest whole number (17 marks) c) Without considering the net present values, what benefits would Peppermint get if it chooses to lease the machine? (4 marks) QUESTION 3 As part of its modernisation and automation programme, Peppermint Sdn. Bhd. has decided to install a new automated machine for its manufacturing process. The management of the company is considering whether to take a loan and purchase the machine, or to enter into a lease agreement The machine has an invoice price of RM620,000. In addition, the company has to pay RM80,000 for delivery and installation. The company can get the funds from the bank through a four-year amortised loan at a 10% interest rate, with payments to be made at the end of each year. If the machine is purchased, the company can claim capital allowance (i.c. tax depreciation) of 40% on cost in the first year, and 20% on cost in year two year three and year four. Besides, a maintenance fee of RM10,000 per year will be incurred at the end of each year. Alternatively, the supplier of the machine has offered to lease the machine to Peppermint at annual lease payment of RM180,000 over four-year period, payable at the beginning of the year. The lessor will bear the maintenance fee. However, the company has to pay the cost of delivery and installation (same amount as under the purchase option). No capital allowance is available for leased asset. At the end of the lease period, the machine will be returned to the supplier The machine has an expected useful life of ten years. However, Peppermint plans to replace the machine after four years so it can always use the latest technology available in the market. The expected residual value of the machine at the end of the fourth year is RM30,000. Any profit from the disposal is taxable, and any loss is tax deductible. The income tax rate applicable for the company is 24%. Interest on loan and revenue expenditure are deductible for tax purpose. The company's cost of capital is 15%. Required: a) Produce amortisation table for the bank loan taken to finance the purchase of the machine. (4 marks) b) Based on the net present value of each cash outflow stream of purchase option and lease option, should Peppermint purchase or lease the machine? Round your answer to the nearest whole number (17 marks) c) Without considering the net present values, what benefits would Peppermint get if it chooses to lease the machine? (4 marks)
