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solution

Lucky Cementwants to evaluate an acquisition of an equipment worth Rs 300,000. Its marginal tax rate is 35 percent. If purchased, the depreciation of equipment will take place at straight line method. The salvage value of the equipment is assumed to be 30,000 at the end of its useful life of 10 years. If the equipment is purchased, Lucky cement will finance the asset through borrowing from bank at annual before tax cost of 10%. If equipment is leased, Lucky Cement can have the equipment at Rs 38000 pre-tax rate per year, which is to be paid at the beginning of each year. Company’s weighted average after tax cost of capital is 10 percent.

  1. Compute the net advantage to leasing (8 marks)
  2. What alternative, leasing or owning, should be chosen? Explain (2 mark)

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