Advise the company by considering the after-tax cost of debt

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M/s Gama & Co. is planning of installing a power-saving machine and are considering buying or leasing alternative. The machine is subject to the straight-line method of depreciation. Gama & Co. can raise debt at 14% payable in five equal annual installments of Rs 1,78,858 each, at the beginning of the year. In the case of leasing, the company would be required to pay an annual end-of-year rent of 25% of the cost of the machine for years.

The company is in the 40% tax bracket. The salvage value is estimated at Rs 24,998 at the end of 5 years.

Problem 1: Evaluate the two alternatives and advise the company by considering the after-tax cost of debt concept under both alternatives.

PV factors 0.9225, 0.8510, 0.7851, 0.7242, 0.6681 respectively, for 1 to 5 years.

Reference no: EM132931281

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