A company is considering investing in a revenue producing asset that has a cost of R5...
Fantastic news! We've Found the answer you've been seeking!
Question:
![](https://dsd5zvtm8ll6.cloudfront.net/si.experts.images/questions/2023/09/64fc356965a83_1694293517209.jpg)
![](https://dsd5zvtm8ll6.cloudfront.net/si.experts.images/questions/2023/09/64fc35731834b_1694293528889.jpg)
Transcribed Image Text:
A company is considering investing in a revenue producing asset that has a cost of R5 million. The asset has a useful life of four years and is expected to produce before- tax cash flows (EBITDA) of R1.55 million a year in today's money. This will grow by inflation of 5% a year from the beginning of year 1. The company will depreciate the asset over its life at 25% a year on a straight-line basis for tax purposes and expects to be able to sell the asset at the end of the fourth year for 10% of its cost in year four. The company's nominal cost of capital is 10%, the tax rate is 28% and tax is paid in the same year that cash flows are received. The company can either purchase the asset from the asset manufacturer or lease it from a reputable leasing company. The company can finance the purchase of the asset through a 10.5% bank loan. The loan will be repaid in four equal instalments. If the company purchases the asset, it will be responsible for its maintenance and insurance. Maintenance costs will amount to R125 000 in year 1 and will increase in line with inflation. Insurance costs will amount to R75 000 per year and will remain constant during the life of the asset. The company can lease the asset for a four-year period at an annual lease charge of R1.35 million. The lease payments will be made at the beginning of each year. The lease payments are fully tax deductible. The tax benefit will arise at the end of each year. Required: 1.1 1.2 Calculate the net present value of the asset and advise management whether they should acquire the asset. (10) Using relevant calculations, advise management whether to purchase or lease the asset. (10) A company is considering investing in a revenue producing asset that has a cost of R5 million. The asset has a useful life of four years and is expected to produce before- tax cash flows (EBITDA) of R1.55 million a year in today's money. This will grow by inflation of 5% a year from the beginning of year 1. The company will depreciate the asset over its life at 25% a year on a straight-line basis for tax purposes and expects to be able to sell the asset at the end of the fourth year for 10% of its cost in year four. The company's nominal cost of capital is 10%, the tax rate is 28% and tax is paid in the same year that cash flows are received. The company can either purchase the asset from the asset manufacturer or lease it from a reputable leasing company. The company can finance the purchase of the asset through a 10.5% bank loan. The loan will be repaid in four equal instalments. If the company purchases the asset, it will be responsible for its maintenance and insurance. Maintenance costs will amount to R125 000 in year 1 and will increase in line with inflation. Insurance costs will amount to R75 000 per year and will remain constant during the life of the asset. The company can lease the asset for a four-year period at an annual lease charge of R1.35 million. The lease payments will be made at the beginning of each year. The lease payments are fully tax deductible. The tax benefit will arise at the end of each year. Required: 1.1 1.2 Calculate the net present value of the asset and advise management whether they should acquire the asset. (10) Using relevant calculations, advise management whether to purchase or lease the asset. (10)
Expert Answer:
Answer rating: 100% (QA)
Lets calculate the net present value NPV of acquiring the asset and compare it to the leasing option To do this well calculate the NPV of the cash flo... View the full answer
Related Book For
Intermediate accounting
ISBN: 978-0077647094
7th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson
Posted Date:
Students also viewed these finance questions
-
Give a high-level description (like the pseudocode we use in class) of deterministic single-tape Turing machines that decide the following languages: 1. L ={01|0,j = 2'} 2. L2 = {(abba) | i is prime}...
-
A company is considering building a new and improved production facility for one of its existing products. It would be built on a piece of vacant land that the firm owns. This land was acquired four...
-
Nuval Audio Systems (NAS), Inc. is evaluating the market potential of producing and marketing latest version of a voice recognition (VR) computer keyboard. The results of an initial questionnaire...
-
The _________ is a checklist that is best suited for property and tangible asset tracking. Perils analysis Industry list List of assets The activity list
-
Should you drop your decision-analysis course? Suppose you faced the following problem: If you drop the course, the anticipated salary in your best job offer will depend on your current GPA:...
-
The specific weight (wt./vol.) of brass is 520 lb/ft3. Determine its density (mass/vol.) in SI units. Use an appropriate prefix.
-
Visit the Sephora website (www.sephora.com). Explore the Sephora Collection, which is their private-label brand. How does Sephora position this brand in the market vis--vis the national brands?
-
What do you think are the main reasons for the trend toward "managing by the numbers," as discussed in the case? Do you believe that this is happening in many organizations, or is it an isolated...
-
A company had net income of $244,410. Depreciation expense is $23,102. During the year, Accounts Receivable and Inventory increased by $18,595 and $36,383, respectively. Prepaid Expenses and Accounts...
-
1 What are the main components of personal financial planning? Solve What is the purpose of a financial plan? Solve Identify some common actions taken to achieve financial goals. How does a job...
-
Jane is 30 years old and is saving for her retirement. She is planning on making 36 contributions to her retirement account at the end of each of the next 36 years. The first contribution will be...
-
1. Write short notes on Discrete Cosine Transform (DCT) 2. Describe Fast Fourier Transform 3. Write short notes on the Hotelling transform
-
1Explain Discrete Fourier Transform in detail. 2. Explain the Properties of 2D discrete Fourier Transform 3. Discuss Hadamard's transformation in detail
-
1. Specify the objective of image enhancement technique. 2. List the 2 categories of image enhancement. 3. What is the purpose of image averaging? 4. What is meant by masking? 5. Define histogram.
-
6. What is meant by histogram equalization? 7. Differentiate linear spatial filter and non-linear spatial filter. 8. Give the mask used for high boost filtering. 9. What is meant by a laplacian...
-
11. What do you mean by Point processing? 12. Define Derivative filter? 13. Define spatial filtering 14. What is a Median filter? 15. What is maximum filter and minimum filter? 16. Write the...
-
Question 21 Not yet answered Marked out of 1.00 P Flag question An auditor assesses management's ability to identify and respond to its business risks because it reduces the Select one: a preliminary...
-
Three forces with magnitudes of 70pounds, 40 pounds, and 60 pounds act on an object at angles of 30, 45, and 135, respectively, with the positive x-axis. Find the direction and magnitude of the...
-
Distinguish between the revenue/expense and the asset/liability approaches to setting financial reporting standards.
-
What is a purchase option? How is a lease potentially affected by a purchase option?
-
The following questions are adapted from a variety of sources including questions developed by the AICPA Board of Examiners and those used in the Kaplan CPA Review Course to study the statement of...
-
10.7. As a regional managing director of Finco, a U.S.- based investment company, your mandate is to scour the Midwest in search of promising investment opportunities and to recommend one project to...
-
10.3. Respond to parts a through d. a. What are the incremental cash flows associated with Small Corp.s undertaking project X? Are these inflows or outflows, costs or revenue? b. What is the PV of...
-
10.5. Let Bt price per $100 of face value of a zerocoupon bond maturing at year t. Then, if B1 $94.00, B2 $88.20, B3 $81.50, B4 $76.00, and B5 $73.00, implying that the term structure of...
![Mobile App Logo](https://dsd5zvtm8ll6.cloudfront.net/includes/images/mobile/finalLogo.png)
Study smarter with the SolutionInn App