Ion Ltd has decided to expand its production capacity by going for new machinery costing...
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Finance
Ion 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
Hyoerion Ltd is willing to lease the plant to Ion 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 Straight line method. There is no salvage value.
Ion Ltd has an effective tax rate of 35 % and its post- tax cost of debt is 7 %.
What is the net advantage of leasing (NAL) for Ion Ltd? What is your final decision? Provide suitable explanations for your choices.
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