You are hired as an analyst for Engro Corporation. During your first assignment, you are asked to perform a buy versus lease analysis on a newly developed machine. The machine cost Rs. 1,200,000 and if Engro decide to purchase it, a term loan can be obtained at a cost of 10%. The amount of the loan will be amortized in 4-year machine life (with the payments made at the end of each year). This is the special purpose machine and falls into MACRS 3-year class for depreciation purpose. The depreciation rates for this machine are 33%,45%,15%, and 7% for the next four years, respectively. The purchase of the machine will result in a maintenance cost of Rs. 25,000 payable at the beginning of each year. The residual salvage value of the machine is estimated to be Rs. 125,000 after its useful life of 4-years. Because of rapid changes in technology and uncertainty around residual value, a useful alternate is to arrange this machine through leasing. Orix leasing company has shown interest to give the machine at a 4-year lease, including its maintenance, for a total payment of Rs. 340,000 at the beginning of each year. Engro’s federal tax rate is 40%. The management has asked you to help by answering the following questions. a. Calculate the Engro’s present value cost of owning the machine (Hint: Calculate the present value of all the cashflows from year 0 to year 4). Explain the logic for the discount rate you used to find the PV (3 marks) b. What is Engro’s present value cost of leasing the Machine? (Hint: Again, repeat what you did in case of owning the machine in part a). Is there any net advantage to leasing? Should Engro buy or lease the Machine? Explain (3 marks)
You are hired as an analyst for Engro Corporation. During your first assignment, you are asked to perform a buy versus lease analysis on a newly developed machine. The machine cost Rs. 1,200,000 and if Engro decide to purchase it, a term loan can be obtained at a cost of 10%. The amount of the loan will be amortized in 4-year machine life (with the payments made at the end of each year). This is the special purpose machine and falls into MACRS 3-year class for
Because of rapid changes in technology and uncertainty around residual value, a useful alternate is to arrange this machine through leasing. Orix leasing company has shown interest to give the machine at a 4-year lease, including its maintenance, for a total payment of Rs. 340,000 at the beginning of each year. Engro’s federal tax rate is 40%. The management has asked you to help by answering the following questions.
a. Calculate the Engro’s
b. What is Engro’s present value cost of leasing the Machine? (Hint: Again, repeat what you did in case of owning the machine in part a). Is there any net advantage to leasing? Should Engro buy or lease the Machine? Explain (3 marks)
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