Question
XYZ Ltd., is in the business of manufacturing of steel utensils. The firm is planning to diversify and add a new product line. The firm
XYZ Ltd., is in the business of manufacturing of steel utensils. The firm is planning to diversify and add a new product line. The firm either can buy the required machinery or get it on lease. The machine can be purchased for Rs. 15,00,000. It is expected to have a useful life of 5 years with a salvage value of Rs. 1,00,000 after the expiry of 5 years and depreciation on straight line basis. The purchase can be financed by 20 per cent loan repayable in 5 equal annual installments (inclusive of interest) becoming due at the end of each year. Alternatively, the machine can be taken on year-end lease rentals of Rs. 4,50,000 for 5 years. Advice the company on the option it should choose. For your exercise, you may assume the following: a. Tax rate is 35 per cent and cost of capital is 20 per cent. b. Lease rentals are to be paid at the end of the year. c. Maintenance expenses estimated at Rs. 30,000 per year are to be borne by the lessee
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