Socks Ltd manufactures shoes and socks and wants to expand its product line. The management of…

Socks Ltd manufactures shoes and socks and wants to expand its
product line. The management of the company has indicated that a
new machine is required to manufacture a new line of brightly
coloured socks. To purchase the machine, it has negotiated
financing with a favourable before tax cost of 10% interest per
annum, with equal annual instalments. Alternatively, the company
can enter into a direct financial lease with the manufacturer of
the machine, which means that the manufacturer will offer the
machine with maintenance on it, for the useful life of the machine
at a total cost of R90 000 per year, paid at the end of each year,
for four years. The machine costs R500 000 and it is expected that
it will require maintenance of R40 000 per year, if bought. It is
also expected that the machine can be sold for R40 000 at the end
of its useful life of four years. The machine can be depreciated by
way of the straight-line method over a period of four years. A tax
rate of 28% is applicable. The company has a before- tax cost of
debt of 10%.

Required: Determine the net advantage of leasing and advise the
company on the option they should take based on your findings.