Question

The Vision Company is evaluating the acquisition of an asset that it requires for a period of 6 years. The following information relates to the purchase of the asset:

a) The purchase price is $1 million.

b) It can be depreciated at a rate of 10 per cent per annum, straight-line.

c) The estimated disposal value in 6 years' time is $300 000.

d) The company income tax rate is 30 cents in the dollar.

e) The required rate of return on the investment is 15 per cent per annum after tax.

Assume that the company has the alternative of leasing the asset from the Ajax Leasing Company. Assume also that the after-tax cost of an equivalent loan is 9 per cent per annum. Assuming that the annual lease payments are made at the beginning of each year and that the lease specifies a residual value of $300 000, what lease payments would make Vision indifferent between buying or leasing the asset?

Answer 1