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Tiong Nam Tonic TNT needs to expand its production capacity To do so the company must acquire a machine costing $120000 The machine can be leased or purchased The terms of the lease and

Tiong Nam Tonic (TNT) needs to expand its production capacity. To do so, the company must acquire a machine costing $120,000. The machine can be leased or purchased. The terms of the lease and purchase plans are as follows:- Lease: The leasing arrangement requires beginning-of-year payments of $40,000 over 4 years. Under the leasing arrangement, the lessee is required to insure the machine during the contract period. TNT insurance broker has informed that the annual insurance premium is about $1,200, on cash before cover basis. All other costs will be paid by the lessor. Purchase: If TNT were to purchase the machine, its cost of $120,000 will be financed with a 4-year loan, with a fixed annual repayment, interest calculated on a yearly rest basis. The after-tax cost of borrowing is 8.05%. The machine will be depreciated using straight line method towards a zero salvage value. TNT will pay $10,000 per year for the service contract that covers maintenance and other related costs. The lender, SME Bank, also requires TNT to insure the machine and the annual insurance premium and terms of payment is similar, as advised by TNT insurance broker. TNT plans to dispose the machine for an estimated value of $15,000 at the end of year 4. TNT cost of capital is 12% and its tax rate is 30%. Which alternative - lease or purchase - would you recommend?

Aug 16 2020 View more View Less

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