Sage Senses Ltd is a manufacturer of wellness products.
The directors of Sage Senses Ltd have decided to invest in a new lotion manufacturing machine to meet the growing customer demands. The following information relates to the manufacturing machinery which Sage Senses Ltd is considering leasing or buying.
Life of asset:
5 years Cost if purchased: R15 000000
Residual value: 3000000
Lease details: Five annual repayments of R3 300000 to begin at the start of the lease
The first lease payment (or the purchase price) would be due on 1 January 2024.
The purchase price would not be eligible for tax depreciation allowances but lease payments would be allowed as a deduction from profit for tax purposes.
Sage Senses Ltd has a 31 December year-end and pays corporate income tax at 27% one year after the year-end in which profits are earned. The post-tax cost of debt is 8% per annum and Sage Senses Ltd makes sufficient profits to obtain tax relief on lease payments as they arise.
Required:Calculate the net after tax benefit of leasing the asset as opposed to buying it
.