Turner plc is considering whether to buy a machine costing K100,000 through a three-year loan with interest at 14% per year. The machine would have zero scrap value at the end of it's three -year life. Alternatively, the machine could be leased for K320,000 per year, payable in arrears. Corporate tax is payable at 30 percent and capital allowances are available over the life of the machine on a 25% reducing balance basis. Calculate whether the company should lease or buy the machine.

Turner plc is considering whether to buy a machine costing K100,000 through a three-year loan with interest at 14% per year. The machine would have zero scrap value at the end of it's three -year life. Alternatively, the machine could be leased for K320,000 per year, payable in arrears. Corporate tax is payable at 30 percent and capital allowances are available over the life of the machine on a 25% reducing balance basis. Calculate whether the company should lease or buy the machine.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 24P

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