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FIN3701 Assignment 2 Semester 2 2024 (232193) - DUE 16 September 2024
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QUESTIONS WITH ANSWERS FIN3701 Assignment 2 Semester 2 2024 (232193) - DUE 16 September 2024
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[Date]FIN3701 Assignment 2
Semester 2 2024
(232193) - DUE 16
September 2024
Questions with COMPLETE ANSWERS
, FIN3701 Assignment 2 Semester 2 2024 (232193) - DUE 16 September
2024
QUESTION 1 [25 marks]
Bakoni Group (Pty) Ltd is considering investing in a new cable car. The
company can either borrow the funds required to purchase the cable car or
it can enter into a finance lease with a reputable finance house. The current
tax rate is 28%, and tax is payable in the year that it is incurred. The South
African Revenue Services (SARS) will allow lease, interest and
maintenance costs to be deducted for tax purposes. Assume that Bakoni
Group (Pty) Ltd has sufficient taxable income to ensure that all deductions
can be made immediately (i.e. there is no assessed loss). Lease option:
Finance lease payments of R90 000 per year, payable in arrears, will need
to be made for a period of five years. Bakoni Group (Pty) Ltd will be
responsible for maintenance costs of R50 000 per year, beginning in year
2. Purchasing option: The company can get the funds required to purchase
the cable car through a five-year loan from Absa Bank at an interest rate of
10%. The new cable car can be purchased at a cost of R400 000. Bakoni
Group (Pty) Ltd will qualify for a wear-and-tear allowance of 25% per year
on the straight-line method from SARS. The estimated residual value of the
asset at the end five years is R60 000. Bakoni Group (Pty) Ltd will be
responsible for maintenance costs of R50 000 per year, beginning in year
2. REQUIRED: Purchase option
1.1 Calculate the annual payment. (2 marks)
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