B) Discuss the practical limitations of the Replacement Analysis you have undertaken in Part A. Venta Co has decided to accept an investment project and is now considering financing it with a lease. The asset used for the investment project could be leased over four years at a rental of £36,000 pa, payable in advance for each year. Tax is payable at 30%, one year in arrears. The post-tax cost of borrowing 10%.
C) Calculate the Net Present Value of the lease.

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A decision by Venta Co has to be made on the replacement policy for its delivery van. The delivery van cost £12,000 and the following additional information applies: Asset kept for Trade-In Maintenance cost at end of year £0 Assets sold at End of year Allowance 1 £9,000 1 year 2 £7,500 2 years £1,500 in 1 year £7,500 3 years £2,700 in 2nd year Note that the Van is only maintained at the end of the year if it is to be kept for a further year. That is, there are no maintenance costs in the year of replacement. Venta Co has a cost of capital of 15% pa. Ignore Taxation and Inflation Required (A) Using appropriate calculations determine the Optimal Replacement Policy. A decision by Venta Co has to be made on the replacement policy for its delivery van. The delivery van cost £12,000 and the following additional information applies: Asset kept for Trade-In Maintenance cost at end of year £0 Assets sold at End of year Allowance 1 £9,000 1 year 2 £7,500 2 years £1,500 in 1 year £7,500 3 years £2,700 in 2nd year Note that the Van is only maintained at the end of the year if it is to be kept for a further year. That is, there are no maintenance costs in the year of replacement. Venta Co has a cost of capital of 15% pa. Ignore Taxation and Inflation Required (A) Using appropriate calculations determine the Optimal Replacement Policy.

Answer rating: 100% (QA)

A The correct method is to use EAC Equivalent annual cost for all three options and select the one w... View the full answer