Accounting company is planning to acquire a machine costing K500,000. Effective life of the machine is 5 years. The company is considering two options. One is to acquire the machine through leasing and the other is by borrowing K500,000 from its bankers at 10% p.a. simple interest. The principal amount of the loan will be paid in 5 equal annual instalments. The machine will be sold at K50,000 at the end of 5th year. The following is further information: a) Principal, interest, lease rentals are payable on the last day of each year. b) The machine will be fully depreciated over its effective life. c) Tax rate is 30% and after tax cost of capital is 8%. REQUIRED: Compute the lease rentals payable which will make the firm indifferent to the loan.

Accounting company is planning to acquire a machine costing K500,000. Effective life of the machine is 5 years. The company is considering two options. One is to acquire the machine through leasing and the other is by borrowing K500,000 from its bankers at 10% p.a. simple interest. The principal amount of the loan will be paid in 5 equal annual instalments. The machine will be sold at K50,000 at the end of 5th year. The following is further information: a) Principal, interest, lease rentals are payable on the last day of each year. b) The machine will be fully depreciated over its effective life. c) Tax rate is 30% and after tax cost of capital is 8%. REQUIRED: Compute the lease rentals payable which will make the firm indifferent to the loan.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 28P

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