Which financing option should NZ Ltd choose? Show your calculations of the cost of each financing option. Use whole numbers when rounding.
NZ Ltd has decided to install a new item of plant, which will cost $500,000. The following alternative financing arrangements are available:
Purchasing finance by borrowing
Amount borrowed $500,000
Term of loan 5 years
Interest rate 9.7% payable annually
Lease plan
Amount of finance $500,000
Term 5 years
True interest rate 9.1%
Annual instalments $128,880
Additional information
The tax rate is 28%. Assume that tax benefits arising from deductible expenditures are received in the year of the expenditure. NZ Ltd uses the after-tax borrowing rate as a discount rate.
Which financing option should NZ Ltd choose?
Show your calculations of the cost of each financing option. Use whole numbers when rounding.
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