FIN3701 Assignment 2
Semester 2 2024 (232193) -
DUE 16 September 2024
QUESTIONS WITH 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)
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)
1.4 Calculate the present value of cash outflows resulting from the purchase. (3 marks)
Lease option
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