FIN3701
Assignment 2
Semester 2
2024 (232193) -
DUE 16
September
2024
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Financial Management
FIN3701 Assignment 2 COMPLETE ANSWERS) Semester 2 2024 (232193) -
DUE 16 September 2024 ; 100% TRUSTED Complete, trusted solutions and
explanations.
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 KINDLY NOTE THAT THERE ARE TWO COMPULSORY
ASSIGNMENTS FOR THE SECOND SEMESTER. 11 of 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
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