Bricks wants to expand its operations as it is experiencing rapid growth. The company needs to obtain another furnace urgently in order to meet increased demand. In purchasing the furnace it wants, it has negotiated financing with a before-tax cost of 13% interest per annum and the capital amount being repaid in full only at the end of the loan. Alternatively the company can enter into a direct financial lease with the manufacturer of the machine, which means that the manufacturer will offer the machine and maintenance on it for the useful life of the machine at a cost.
The machine costs R500 000 and it is expected that it will require maintenance of R50 000 per year, if bought. It also expected that the machine can be sold for R100 000 at the end of its useful life of five years. The machine can be depreciated by way of the straight line method over a period of five years.
The lease will cost R125 000 per year, paid at the end of every year for five years.
A tax rate of 28% is applicable.
The company has a before -tax of debt of 13%
Required:
Determine the Net Advantage of Leasing and advise the company on the option they should take based on your finding.