Galhadi Telecommunications Ltd

Multiple Choice

Galhadi Telecommunications Ltd. can finance the purchase of $650,000 worth of electronic infrastructure by a bank loan where both principal and interest are paid at the end of the term. The interest rate being offered is 10%, compounded annually, maturing in 5 years. Alternatively, the company can enter into a lease to buy arrangement, where the interest rate is also 10% per year, compounded annually and payments of $158,442 are made at the beginning of each year for five years. Which is the better financial alternative and by how much?

A) The lease to buy saves a $68,189 in total interest paid.
B) The bank loan saves $153,054 in total interest paid.
C) The lease to buy saves $153,054 in total interest paid.
D) The bank loan has a lower present value cost by $49,378.
E) The bank loan has a lower present value cost of $10,687.