Using relevant calculations, advise BTA on which of the two machines to acquire.

A small fiber infrastructure provider is considering acquiring 10 new pickup trucks for use in transporting cables and equipment to and from the site. The company can either lease or purchase the trucks:
• Purchase. The company can purchase the trucks at a cost of R400 000 per truck, and finance them through a 12% five-year bank loan. The loan will be repaid in equal end-of-year installments. The purchase of the trucks comes standard with a six-year or 90 000 km service plan. The company estimates that the service plan will only be valid for two years, after which the company will take out a maintenance plan for each truck at a cost of R10 104 per year. The company also estimates that the comprehensive warranty will only be valid for three years, at the end of which the company will purchase an extended warranty at a cost of R5 220 per year per truck. The company will ensure each of the trucks at a cost of R13 440 per year. The insurance premiums will be payable at the beginning of each year. It is estimated that, at the end of five years, each truck will have a resale value equal to 30% of its cost. The trucks will be depreciated at the rate of 25% per annum on cost.
• Lease. The company can lease the trucks from The Bakkie Leasing Company (TBLC) for a period of four years. TBLC offers full maintenance leases, operating leases, and sale- and lease-back transactions. The Operations director suggests that the company selects the full maintenance lease, as that allows the company to worry about providing the company with fibre infrastructure than maintaining the trucks. In addition, TBLC offers the following mileage options on its truck leases:
– A lower mileage option of a maximum of 20 000 kilometres per annum plus R12 per kilometre for any mileage in excess of the annual maximum mileage.
– A higher mileage option of a maximum of 50 000 kilometers per annum plus R15 per kilometer for any mileage in excess of the annual maximum mileage.
Due to the nature of its business, management feels that the higher mileage option is the best option for the company. Lease payments are due at the beginning of each year. Both lease options offer the company the option to buy the trucks at the end of the lease; however, management feels that there is no need to exercise this option. TBLC will require that the company agrees to a residual value guarantee, i.e. if the fair value of each truck is below R160 000 at the end of the lease term, the company will pay TBLC an amount equal to the difference between R160 000 and the fair value of the truck. The company’s management estimate that the most the company will pay under the residual value guarantee will be R20 000 per truck. Under the preferred full maintenance lease option, insurance and maintenance of the trucks will be the responsibility of TBLC.
The purchase option costs R78 000 per truck per year, while the lease option costs R89 400 per truck per year.
The corporate tax rate is 28%. The company’s cost of capital is 15%.

Answer rating: 100% (QA)

Description Using relevant calculations advise BTA on which of the two machines to acquire A small fiber infrastructure provider is considering acquiring 10 new pickup trucks for use in transporting c... View the full answer