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Question 1(20 marks ) Grand Goals Bhd., is in the business of manufacturing...

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Accounting

Question 1(20 marks )
Grand Goals Bhd., is in the business of manufacturing steel utensils. The firm is planning to diversify and add a new product line. The company require a machinery and can either purchase or get it on lease basis .
The machine can be purchased for $15,000,000. It is expected to have a useful life of 5 years with salvage value of $1,000,000 after 5 years. The purchase can be financed by a 20 percent loan repayable in 5 equal annual instalments ( inclusive of interest) becoming due at the end of each year. Alternatively, the machine can be taken on year-end lease rentals of $4,500,000 for 5 years. You may assume the following:
(a) The company follows written down value method of depreciation, the rate of depreciation being 25 percent.
(b) Tax rate is at 24% and cost of capital is 18 percent
(c) Lease rents are to be paid at the end of the year.
(d) Maintenance expenses is estimated at $ 300,000 per year to be borne by the lessee.
Required
Advice the company, which option it should choose.
(20 marks )

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