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FIN3701 Assignment 2 Semester 2 2024 (232193) - DUE 16 September 2024 R46,74   Add to cart

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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 COMPLETE ANSWERS

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  • August 28, 2024
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FIN3701 Assignment 2
Semester 2 2024 (232193) -
DUE 16 September 2024
QUESTIONS WITH COMPLETE ANSWERS




[School]
[Course title]

, 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)

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