1. The operating manager of Stellar Company wants to buy a new bus costing GHS 500,000....

 

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1. The operating manager of Stellar Company wants to buy a new bus costing GHS 500,000. The bus will last only nine years before going to the scrap yard. The manager is convinced that it is a good investment. He also has the option to lease the bus and make nine annual payments of GHS 57,500 each. Stellar Company would remain responsible for all maintenance, insurance and operating expenses. Depreciation should be calculated using the most appropriate year tax depreciation on schedule attached. Marginal tax rate is 35%. Year(s) 3-Year 5-Year 7-Year 1 33.33 14.29 2 44.45 24.49 3 14.81 17.49 4 7.41 12.49 6 9 Tax Depreciation Schedules by Recovery-Period Class 10 11 12 13 14 15 16 17-20 21 20.00 32.00 19.20 11.52 11.52 5.76 8.93 8.93 8.93 4.45 10-Year 10.00 18.00 14.40 11.52 9.22 7.37 6.55 6.55 6.55 6.55 3.29 15-Year 5.00 9.50 8.55 7.70 6.93 6.23 5.90 5.90 5.90 5.90 5.90 5.90 5.90 5.90 5.90 2.99 20-Year 3.75 7.22 6.68 6.18 5.71 5.28 4.89 4.52 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 2.25 a. Should the operating manager proceed with the lease or buy the bus instead? b. Assume the residual value of the bus at the end of the lease period is GHS 36,000 how does it change the decision in a. c. Under what circumstances will the lease be beneficial to both parties? Show proof. d. Will the foregoing analysis change if the asset being considered were a land? 1. The operating manager of Stellar Company wants to buy a new bus costing GHS 500,000. The bus will last only nine years before going to the scrap yard. The manager is convinced that it is a good investment. He also has the option to lease the bus and make nine annual payments of GHS 57,500 each. Stellar Company would remain responsible for all maintenance, insurance and operating expenses. Depreciation should be calculated using the most appropriate year tax depreciation on schedule attached. Marginal tax rate is 35%. Year(s) 3-Year 5-Year 7-Year 1 33.33 14.29 2 44.45 24.49 3 14.81 17.49 4 7.41 12.49 6 9 Tax Depreciation Schedules by Recovery-Period Class 10 11 12 13 14 15 16 17-20 21 20.00 32.00 19.20 11.52 11.52 5.76 8.93 8.93 8.93 4.45 10-Year 10.00 18.00 14.40 11.52 9.22 7.37 6.55 6.55 6.55 6.55 3.29 15-Year 5.00 9.50 8.55 7.70 6.93 6.23 5.90 5.90 5.90 5.90 5.90 5.90 5.90 5.90 5.90 2.99 20-Year 3.75 7.22 6.68 6.18 5.71 5.28 4.89 4.52 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 4.46 2.25 a. Should the operating manager proceed with the lease or buy the bus instead? b. Assume the residual value of the bus at the end of the lease period is GHS 36,000 how does it change the decision in a. c. Under what circumstances will the lease be beneficial to both parties? Show proof. d. Will the foregoing analysis change if the asset being considered were a land?