Sundowner Company is a profitable company which is considering the purchase of a machine costing Rwf 320,000,000. If purchased, the company would incur annual maintenance costs of Rwf 25,000,000. The machine would be used for three years and at the end of this period would be sold for Rwf 50,000,000. Alternatively, the machine could be obtained under an operating lease for an annual lease rental of Rwf 120,000,000 per year, payable in advance.
The company can claim capital allowances on a 25% reducing balance basis. The company pays tax on profits at an annual rate of 30% and all tax liabilities are paid one year in arrears. The company has an accounting year that ends on 31 December. If the machine is purchased, payment will be made in January of the first year of operation. If leased, annual lease rentals will be paid in January of each year of operation.using an after tax borrowing rate of 7%