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AGD Co is a profitable company which is considering the purchase of a machine costing $320,000. If purchased, AGD Co would incur annual maintenance costs of $25,000. The machine would be used for three years and at the end of this period would be sold for $50,000. Alternatively, the machine could be obtained under an operating lease for an annual lease rental of $120,000 per year, payable in advance.

AGD Co can claim tax allowable depreciation on a 25% reducing balance basis. The company pays tax on profits at an annual rate of 30% and all tax liabilities are paid one year in arrears. AGD Co has an accounting year that ends on 31 December. If the machine is purchased, payment will be made in January of the first year of operation. If leased, annual lease rentals will be paid in January of each year of operation.

Requirements:

a

Using an after-tax borrowing rate of 7%, evaluate whether AGD Co should purchase or lease the new machine.

Marks: 12
b

Discuss whether lease may also provide non-financial benefits.

Marks: 5
c

Explain the difference between risk and uncertainty in the context of investment appraisal.

Marks: 3

Answers submitted

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Abhro Gourab Das's picture
Abhro Gourab Das
12/10/2020 - 20:43
c
10194
3
Rakhi Gupta's picture
Rakhi Gupta
11/07/2020 - 01:28
a
10042
12
Rakhi Gupta's picture
Rakhi Gupta
11/07/2020 - 01:36
b
10044
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Rakhi Gupta
10/20/2020 - 08:46
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9854
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Rakhi Gupta's picture
Rakhi Gupta
10/20/2020 - 09:08
b
9856
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Rakhi Gupta's picture
Rakhi Gupta
10/20/2020 - 09:13
c
9858
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Shakhaoat Hossain shibly's picture
Shakhaoat Hossa...
10/08/2020 - 18:17
a
9764
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Rakhi Gupta's picture
Rakhi Gupta
09/18/2020 - 20:33
a
9714
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Apurba nandy's picture
Apurba nandy
03/02/2020 - 19:06
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8964
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Nafeez Imtiaz Hossain's picture
Nafeez Imtiaz H...
02/27/2020 - 20:51
a
8880
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Md Ishtiak Isty's picture
Md Ishtiak Isty
02/26/2020 - 20:34
a
8842
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Md Ishtiak Isty's picture
Md Ishtiak Isty
02/26/2020 - 20:44
b
8856
5
Md Ishtiak Isty's picture
Md Ishtiak Isty
02/26/2020 - 20:52
c
8870
3
MD. Ohidur Rahman's picture
MD. Ohidur Rahman
02/26/2020 - 20:34
a
8848
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MD. Ohidur Rahman's picture
MD. Ohidur Rahman
02/26/2020 - 20:45
b
8858
5
MD. Ohidur Rahman's picture
MD. Ohidur Rahman
02/26/2020 - 20:55
c
8872
3
Md. Shadequl Islam Shamim's picture
Md. Shadequl Is...
02/26/2020 - 20:33
a
8846
12