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LEASE FINANCING : QUESTION The Hypothetical Ltd is contemplating to have an access to a machine for a period of 5 years. Discussions with various financial institutions have shown that the company can have the use of machine for the stipulated period through leasing arrangement or the requisite amount can be lent at 14% to buy the machine. The firm is in the 50% tax bracket. Document Preview:

LEASE FINANCING : QUESTION The Hypothetical Ltd is contemplating to have an access to a machine for a period of 5 years. Discussions with various financial institutions have shown that the company can have the use of machine for the stipulated period through leasing arrangement or the requisite amount can be lent at 14% to buy the machine. The firm is in the 50% tax bracket. In the case of leasing, the firm would be required to pay annual end of year lease rent of $ 120000 for 5 years. All maintenance, insurance and other costs are to be borne by the lessee. In the case of purchase of the machine (which costs $ 343300), the firm would have 14% five-year loan to be paid in five equal annual installments, each installment becoming due at the end of eah year. The machine would be depreciated on straight line basis, with no salvage value. Advise the company which option it should go for, assuming lease rents are paid (a) at the end of the year (b) in advance.

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question-3.docx