Metric ltd decided to acquire a piece of equipment costing 300 000 of five years. The equipment is expected to have no salvage value at the end and the company uses straight line depreciation method on all its fixed assets. The company has two financing alternative methods available, leasing or borrowing. The loan has an interest rate of 15% requiring equal year-end installments to be paid. The lease would be set at a level that would amortize the cost of equipment over the lease period and would provide the lessor with 14% return on capital. The company’s tax rate is 40%
REQUIRED
Compute the annual lease payments
Compute the PV of the cash outflow under lease financing
Calculate the annual loan installment
Advice the company on which alternative is better and why