Tele-KC a small competitor considering investment into 5G technology. The company is pricing each phone mast and can either lease or buy the machinery.

The purchase price is KD 10,000 and the machine has a 5 year life. If it buys the machine Tele-KC will need to fund it using capital that costs them 9% per year.

Alternatively the lease payments will be KD 2,100 per year for 5 years with rentals payable at the start of each year.

What are the respective present value costs of purchasing the machine or leasing it? (5 marks)

Explain the reasoning for the differences in cost linking to fundamentals of finance theory.

(5 marks)

Critically evaluate the key differences between funding a project via debt or equity finance, from the perspective of the company directors.

(10 marks)

At a recent board meeting one director proclaimed the company should fund all projects with internal sources of financing as they are essentially free using logical arguments and finance theory explain why this statement is incorrect. Clearly explain the cost of each type of finance relative to the risk.

(10 marks)