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What is the net advantage of leasing for crunchy tacos ltd

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Reference no: EM132941809

Crunchy Tacos Ltd has decided to expand its production capacity by going for new machinery costing Rs. 60 million and it is considering two alternatives:

(i) borrowing and purchasing the plant, or
(ii) leasing the plant

  • Gynamede is willing to lease the plant to Crunchy Tacos Ltd for an annual lease rental of Rs.12.2 million for 5 years, the lease rental being payable in arrears.
  • The tax relevant depreciation rate on the plant is 20 % as per the WDV method.
  • The net salvage value of the plant after five years is expected to be Rs.8.75 million.
  • Crunchy Tacos Ltd has an effective tax rate of 35 % and its post- tax cost of debt is 7 %.

Problem 1: What is the net advantage of leasing (NAL) for Crunchy Tacos Ltd? What is your final decision?

Reference no: EM132941809

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