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Determine the company should lease or buy the new technology

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Reference no: EM132727195

YUMIKA Limited is considering an investment in new technology that will reduce operating costs through increasing energy efficiency and decreasing pollution. The new technology will cost $120,000 and it would have a useful life of five years, and it is the company's policy to depreciate the full cost of the investment using straight line basis. It is estimated that the investment shall have a trade-in value of $10,000 at the end of the fifth year.

  • The company could purchase the machine for cash, using bank loan facilities on which the current rate of interest is 9% before tax. If the machine is purchased, the company will be able to claim a tax depreciation allowance of 20% per year. Alternatively, the company could lease the machine under an agreement which would entail payment of $30,000 at the end of each year for the next 5 years.
  • The income tax rate is 20%. Tax is payable or claimable with a year's delay.

Required

Problem 1: Calculate and determine whether the company should lease or buy the new technology?

Reference no: EM132727195

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