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FIN3701 Assignment 2 Semester 2 2024 (232193) - DUE 16 September 2024
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FIN3701 Assignment 2 Semester 2 2024 (232193) - DUE 16 September 2024 QUESTIONS WITH ANSWERS
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FIN3701 Assignment 2Semester 2 2024
(232193) - DUE 16
September 2024
[Company address]
, 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)
1.2 Calculate the annual interest expense deductible for tax purposes for each of
the five years. (5 marks)
1.3 Calculate the after-tax cash outflow resulting from the purchase for each of the
five years. (5 marks)
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