1 (Loan and Rental both Beg)

Rabbi International is considering the acquisition of an equipment costing Taka 350,000. The
equipment has an economic life of 5 years. The company can purchase the equipment by borrowing
at 12 percent. Loan installments are equal and payable at the beginning of every year. Under the
lease alternative, a rental of Taka 85,190 should be paid annually (beginning). The rental includes
maintenance expense of Taka 3000 annually. The estimated salvage value is Taka 35,000. Tax rate is
30 percent. The company charges depreciation in straight line method. WACC is 14 percent. Which
alternative should the firm choose? Estimate the break even rental.

1. (revised) Loan end rental beginning)

Rabbi International is considering the acquisition of an equipment costing Taka 350,000. The

equipment has an economic life of 5 years. The company can purchase the equipment by borrowing
at 12 percent. Loan installments are equal and payable at the end of every year. Under the lease
alternative, a rental of Taka 85,190 should be paid annually (beginning). The rental includes
maintenance expense of Taka 3000 annually. The estimated salvage value is Taka 35,000. Tax rate is
30 percent. The company charges depreciation in straight line method. WACC is 14 percent. Which
alternative should the firm choose? Estimate the break even rental.

2.Shantanu International is considering the acquisition of an equipment costing Taka 150,000. The
equipment has an economic life of 5 years. The company can purchase the equipment by borrowing
at 10 percent. If the loan is taken, Taka 30,000 plus interest (on outstanding loan) should be repaid
annually (at the year end). Government provides 5% tax credit for purchasing new industrial
equipments. Under the lease alternative, a rental of Taka 44,500 should be paid annually. The rental
includes maintenance expense of Taka 2000 annually. Tax rate is 30% and WACC is 13% for the firm.
The company charges depreciation in straight line method. Which alternative should the firm
choose?

What if the lease rental includes a maintenance expense of Taka 5,000 annually?

3.Shujan International is considering the acquisition of an equipment costing Taka 550,000. The
equipment has an economic life of 5 years. The company can purchase the equipment by borrowing
at 14 percent. Loan instalments are equal and payable at the end of every period. Government
provides 5% tax credit (Cost x tax rate) for purchasing new industrial equipments. Under the lease
alternative, a rental of Taka 138,000 should be paid at the beginning of every year. The rental
includes maintenance expense of Taka 12000 annually. Tax rate is 30% and WACC is 15% for the
firm. The company charges depreciation in straight line method. Which alternative should the firm
choose?