Royal Investments Ltd has made a project investment decision requiring the use of a piece of capital equipment costing Kshs, 280,000. The equipment has a five year life with no residual value and its operating costs are identical under either a lease or buy option. If the company purchases the equipment, straight line depreciation applies for tax purposes. The company is considering either buying the equipment or entering into a five year financial lease with annual lease payments of Kshs. 80,000. The first lease payments are made at the beginning of the year. The cost of debt is 12% and the company's tax rate is 30%
Required
Using Net Advantage of Leasing Method (NAL) advise the company on
whether to lease or buy the equipment. (15mks) show your workings
b) Differentiate a financial lease from operating lease. (10mks)