Reference no: EM132410898

Problem: The meat Bengal shop wishes to evaluate two plans for financing an oven: leasing and borrowing to purchase. The firm is in the 30% tax bracket.

Lease: The shop can lease the oven under a 5 year lease requiring annual end of year payments of tk. 15,000. All maintenance and insurance costs will be borne by the lessor. The lessee will exercise its option to purchase the asset for tk. 10,000 at termination of the lease.

Purchase: The oven costs tk. 60,000 and will have a 5 year life. It will be depreciated under straight line method. The total purchase price will be financed by a 5 year, 12% loan requiring equal annual end of year payments. The firm will pay tk. 1000 per year for a service contract that covers all maintenance and insurance costs. The firm plants to keep the equipment and use it beyond its 5 year useful life.

A) For the leasing plan, calculated the following:

1) The after tax cash outflow each year.

2) The present value of the cash outflows.

B) For the purchasing plan, calculated the following:

1) The after tax cash outflow resulting from the purchase for each of the 5 years.

2) The present value of the cash outflow.

C) Advice the company which alternative is good for it and why?