Reference no: EM132319306
Question :
A Client, Fal Staff Limited, has asked you to prepare a comparison of purchase versus lease options in regard to the acquisition of new office equipment.
The equipment costs $475,000 fully installed.
Option 1: Purchase Equipment in client's name.
Fal Staff Limited to provide a deposit of Sioo,000.
Fal Staff Limited to arrange with the bank a five year interest only loan, for the balance of the equipment cost.
As it is to be an interest only loan, the principal to be repaid at the end of the load period.
Interest is payable at the end of each year at 12% per year.
Depreciation is based on zo% Prime Cost.
Option 2: Lease Equipment from Mojo Finance Limited.
Mojo Finance Limited offer lease payments of Siio,000 payable at the beginning of each of the five years.
A $35,000 residual is due to be paid to Mojo Finance Limited at the end of the five years, whatever option is exercised.
Company tax rate is 27.5% payable at the end of the year. Cost of Capital is 10%.
Required: Using Standard Financial Analysis Techniques identify financial flows, trends in returns and adjustments in Asset Values:
(a) Calculate the Net Present Value of the Purchase Option.
(b) Calculate the Net Present Value of the Lease Option.
(c) Recommend which option should be taken and why?