Question
X Ltd is considering the acquisition of equipment costing Ksh.16 million and whose expected useful life is 5 years. The annual rental payments are expected
X Ltd is considering the acquisition of equipment costing Ksh.16 million and whose expected useful life is 5 years. The annual rental payments are expected to be Ksh.5.12 million in arrears. The company is expected to meet maintenance costs relating to the equipment which is to be depreciated at 25% per annum on cost. The corporation tax is expected to be 30% and the incremental borrowing rate is expected to be 12% per annum. The equipment is expected to have a salvage value of Ksh.1.6 million
Required:
Advice on whether the equipment should be acquired by Xenon Ltd by way of leasing or by way of borrowing a loan and then purchasing
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