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Grand Goals Bhd is in the business of manufacturing steel utensils. The firm is planning to diversify and add a new product line. The company require a machinery and can either purchase or get it on lease basis
The machine can be purchased for $ It is expected to have a useful life of years with salvage value of $ after years. The purchase can be financed by a percent loan repayable in equal annual instalments inclusive of interest becoming due at the end of each year. Alternatively, the machine can be taken on yearend lease rentals of $ for years. You may assume the following:
a The company follows written down value method of depreciation, the rate of depreciation being percent.
b Tax rate is at and cost of capital is percent
c Lease rents are to be paid at the end of the year.
d Maintenance expenses is estimated at $ per year to be borne by the lessee.
Required
Advice the company, which option it should choose.
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