1) Southern Pacific Ltd is contemplating the purchase of a new machine. The total cost of the machine is $120000, and the firm plans to pay a deposit of $20000. The balance would be financed by loan. The firm's bank has offered two alternative repayments plans, both at a rate of 14% annually. Plan A involves equal instalments payable at the end of each of the next four years. Plan B requires four equal annual payments at the end of each year plus a balloon payment of $20000 at the end of year 4.

a. Compute annual instalment on plan A

b. Compute annual instalment on plan B

c. Illustrate how the loan amortises on plan A using the amortisation schedule

2. Mountain Springs, a partnership operated by the Von Trapp family is contemplating the purchase of a new computer and software to help prepare the delivery schedules and accounts receivable billing for its deliveries of spring water to customers. The total cost of the system is $80000 and will last for four years, at which the disposal value is $20000. The firm uses straight-line method of depreciation and plans to depreciate the asset to its expected disposal value. The partners think the computer system will save $30000 annually in operating expenses (excluding depreciation and taxes). The firm has been offered a fouryear lease contract with annual payments of $21000 beginning when the contract comes into effect, and with a residual value of $20000. The lessor has offered to absorb all insurance and maintenance costs (worth $3000 per year, payable in advance). The partners have a marginal tax rate of 20%. Alternatively, a loan finance is available at 13% per annum.

REQUIRED: Evaluate whether the firm should lease the system

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