Response to the following problem:
Cold plc has decided to acquire equipment with a current market value of £700 000 and has approached its bank in order to borrow this amount. The bank has indicated that it is prepared to offer a five-year loan at an interest rate of 13 per cent per year, provided it can reach agreement with Cold plc on ways to protect its investment. The equipment would be scrapped after five years and at that time would have negligible scrap value. Cold plc could also lease the equipment for £180 000 per year, payable at the start of each year. The lessor would be responsible for servicing the equipment whereas, if the equipment were bought, Cold plc would incur annual servicing costs of £25 000. Cold plc is a profitable company that pays corporation tax one year in arrears at an annual rate of 30 per cent and can claim annual capital allowances on a 25 per cent reducing balance basis.
(a) Discuss ways in which the bank could protect its loan of £700 000 to Cold plc for the equipment purchase.
(b) Determine the present value of the tax benefits arising on capital allowances if Cold plc decides to purchase the new equipment.
(c) Determine whether, on financial grounds, Cold plc should lease or buy the new equipment.
(d) Critically discuss what other factors may influence the decision of Cold plc to lease or buy the new equipment, apart from financial considerations.