Answer to Question #290609 in Other for maliha

Question

King Corporation Limited (KCL), a producer of electricity, is considering to expand its operation by adding 5 generators. The cost of these generators would be Tk. 100 million. The expected life of the generators is 5 years. The addition of these generators will result in cash inflows of Tk. 50 million per year for 5 years. Cash outflows would be 50% of cash inflows. KCL uses straight line method of depreciation and expects no salvage value from the generators at the end their service lives. IDLC, a leading Non-Bank Financial Institution, offered KCL to lease the generators for 5 years. The lease payments to be made at the beginning of each year would be Tk. 24 million. The annualized risk-free rate of return is 7%. Tax rate for both KCL and IDLC is 30%.

c.      Show the incremental cash flows for lease versus buy to KCL of the generators.

d.      Calculate the NPV from the incremental cash flows. If you are the analyst, would you recommend KCL to take a lease on the generators from IDLC or buy them?

Answer 1

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