Weaving Ltd is a medium-sized Mauritian knitwear company. It assembles jumpers and other forms of knitwear clothing. Despite an adverse economic background, Weaving Ltd has been doing well and is seeking to expand production.

Weaving Ltd is considering acquiring a new piece of machinery, which will increase production. The company can either purchase the machinery or lease it. If it purchases the machinery, it will have to borrow the cash needed. The company can borrow at a rate of 8% under the medium term stimulus package. The principal and interest will have to be paid back in equal instalments over 4 year. The machine costs Rs40 000 and if purchased outright, the purchase will take place at the start of year 1. The machine will have a useful life of 4 years and will be depreciated down to zero value on a straight-line basis. The company faces a tax rate of 15%. The tax regime in force requires companies to pay tax in the year of profit and any tax relief resulting from depreciation can only be claimed by the legal owner of the asset. If the company leases the machine, it will have to make 4 annual lease payments of Rs11,000 starting one year from now.

Required:

(a) Evaluate whether the company should lease or buy the machinery. Your workings should show the Net Advantage of leasing (NAL).

(b) Briefly discuss FOUR factors Weaving Ltd would take into consideration before deciding on the level of debt in its capital structure.