A Ltd. wants to acquire a machine on 1st April, 2013. It will cost ₹60 lakh. It is expected to have a useful life of 5 years. Scrap value will be ₹10,000. If the machine is purchased through borrowed funds, rate of inter

A Ltd. wants to acquire a machine on 1st April, 2013. It will cost ₹60 lakh. It is expected to have a useful life of 5 years. Scrap value will be ₹10,000. If the machine is purchased through borrowed funds, rate of interest is 11.5% per annum. Loan is repayable at the end of 5 years. If machine is acquired through lease, lease rent would be ₹16 lakh per annum. Profit before depreciation and tax is expected to be ₹4.50 crore every year. Depreciation is charged @ 15% on written down value. Besides, additional depreciation is available in the first year. Investment allowance is, however, not available. Average rate of tax may be taken at 32.445%. A Ltd. seeks your advice whether it should — Acquire the machine through own funds or borrowed funds; or Take it on lease. Present value factor shall be taken @10%. At this rate present values of rupee one are — year 1: 0.9091; year 2: 0.8264; year 3: 0.7513; year 4: 0.6830; and year 5: 0.6209.