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Q No Saad & co Builders need to acquire the use of a construction machinery for...
Q No Saad & co Builders need to acquire the use of a construction machinery for construction business and are considering buying or leasing a machinery. The construction machine costs Rs. 10 Million and is subject to the straight-line method of depreciation to a zero-salvage value at the end of 5 years. In contrast, the lease rent is Rs 2.5 Million per year to be paid for 5 years. If the asset is purchased, the bank would lend Saad Builders the 10 million at a rate of 12% each year on a 5-year, simple interest loan. The firm would have to pay interest at the end of each year for 5 years and return the 10 million of principal at the end of Year 5. The company is in the 30% tax bracket. Should it lease or buy the construction machine?
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