Cinopharm Bhd. (Cinopharm) is a large healthcare company that produces and distributes the CinoVac Covid-19 vaccine. The year-end for the company is 30 June 2022.

b. On 1 July 2021, Cinopharm is considering providing company cars for its senior management and is comparing three alternatives.

Alternative 1: The car can be leased with a 12-month agreement on 1 July 2021 with no purchase alternative. The cost would be RM3,800 per month in advance including servicing charge.

Alternative 2: The cars can be bought for RM150,548 with a 100% loan from a bank. The cars would be bought on 1 July 2022 and held for four years. The estimated residual value is RM59,506. Monthly service costs would be RM470 per month. The loan would be repayable in four annual installments starting 1 July 2022. Assume that an average annual percentage rate on a loan is 5%.

Alternative 3: A final alternative is to lease the cars for a period of four years starting 1 July 2021. The cars have a total market value of RM150,548 on this date. The lease requires a monthly payment of RM2,806 for the duration of the lease term of which RM470 is a servicing charge. Cinopharm wishes to show the service charge as a separate line item in profit or loss.

 At the end of the four-year period, there is no alternative to renew the lease or buy the cars, and there is no residual value guarantee. The interest to be charged for the year ended 30 June 2022 is calculated at RM4,548 based upon the implicit interest rate in the lease. The net present value of the lease payments over four years is RM101,606 excluding the service charge.

Other relevant information: the profit before tax and before accounting for any of the above three alternatives for cars is likely to be RM200,000 for the year ended 30 June 2022. Cinopharm depreciates cars over a four-year period using straight-line depreciation.

You are required to: explain with relevant calculations, the impact of the three alternatives for company cars on: 

(i) earnings before interest, tax, depreciation; and amortization (EBITDA), 

(ii) profit before tax, and 

(iii) the statement of financial position for the year ended 30 June 2022.

Answer rating: 100% (QA)

i EBITDA will be higher under Alternative 2 and 3 as there are no upfront costs associated with thes... View the full answer