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Question 4.1 (15 Marks) Rocks Ltd manufactures wall cladding and wants to expand its product line The management of the company has indicated that a
Question 4.1 (15 Marks) Rocks Ltd manufactures wall cladding and wants to expand its product line The management of the company has indicated that a new machine is required to manufacture a new line of cladding To purchase the machine, it has negotiated financing with a before tax cost of 11% interest per annum with equal annual instalments Alternatively, the company can enter into a direct financial lease with the manufacturer of the machine, which means that the manufacturer will offer the machine and maintenance on it for the useful life of the machine at a cost The machine costs R600 000, and it is expected that it will require maintenance of R70 000 per year, if bought It is also expected that the machine can be sold for R130 000 at the end of its useful life of five years The machine can be depreciated by means of the straight-line method over a period of five years The lease will cost R200 000 per year paid at the beginning of each of the next five years A tax rate of 28% is applicable The company has a before tax cost of debt of 11% Required: Determine the net advantage of leasing and advise the company on the option they should take based on your findings
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