You have just been hired as the financial manager of a private company, Crunchy Grub, which produces food products such as breakfast cereals and bread. As part of their manufacturing process, they require a new industrial oven. The question is whether they should purchase the new oven or lease it. The firms previous financial manager made the decision that an operating lease agreement would be optimal, however as he did not sign the lease contract before he left, you have decided to review his decision.

The information that the previous manager presented in favour of his decision to lease is as follows:

- The new oven will cost R350 000 and can be depreciated straight-line to zero over its three-year lifespan. Its anticipated scrap value after 3 years is R32 000. The oven will require insurance and maintenance totaling R40 000 per year.

- If the firm purchases the oven, they will have to fund the purchase price with a loan at a cost of prime + 2%.

- If the firm leases the oven, the lease payments will have to be made at the beginning of each year. The lessor will be responsible for insurance and maintenance expenses.

- The net advantage to leasing amounts to R25 291.

- The firm pays tax at a rate of 30% and their cost of capital is 10%.

- According to the SARB, the prime lending rate is currently 5% and is not expected to change in the next three years