Reference no: EM132539912

Yamrot Company, a small machine shop, is contemplating acquiring a new machine tool costing Br. 24,000. Arrangements can be made to lease or purchase the machine. The firm is in the 40% tax bracket. Lease: The firm would obtain a five-year lease requiring annual end-of-year lease payments of Br 6,000. All maintenance costs would be paid by the lessor, and insurance and other costs would be borne by the lessee. The lessee would exercise its option to purchase the machine for Br. 4,000 at termination of the lease.

Purchase: The firm would finance the purchase of the machine with a 9%, 5-year loan requiring end-of-year installment payments of Br. 6,170. The machine would be depreciated at a percentage of -20% in year 1, 32% in year 2, 19% in year 3, and 12% in year 4 and 5. The firm would pay Br. 1,500 per year for a service contract that covers all maintenance costs; insurance and other costs would be borne by the firm. The firm plans to keep the machine and use it beyond its 5-year recovery period.

Required:

Question 1: Determine whether buying or leasing is preferable