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Question Four ABC Lud has docided to acquire a piece of equipment costing Kshs 240,000 of five years. The equipment is expected to have no
Question Four ABC Lud has docided to acquire a piece of equipment costing Kshs 240,000 of five years. The equipment is expected to have no salvage value at the end and the company uses straight-line depreciation method on all it Fixed Assets. The company has two financing altemative methods available, leasing or borrowing. The loan has an interest rate of 15% requiring equal-year-end instaiments to be paid. The lease would be set at a level that would amortize the cost of equipment over the lease period and would provide the lessor with a 15% rctum on capital. The company's tax mite is 40%. REQUIRED: i) Compute the annual lease payments ii) Compute the PV of the cash out flow under lense financing iii) Calculate the anmual loan instalment payment. (10 Marks)
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