AllOils Limited is considering purchasing a delivery vehicle for the delivery of their lubricants. The only truck that they had was in an accident and is now written off. AllOils Limited has the option to either purchase or lease the new truck however they are not sure which option is better and have therefore requested your help to determine this. The details are listed below.

Purchase price is R850 000 or take out a lease over a 5 year period. The lease option will require a deposit of R200 000 and payments of R150 000 per year at the end of each year. Maintenance and service charges will be borne by the

ADVANCED DIPLOMA IN FINANCIAL MANAGEMENT- ACADEMIC AND ASSESSMENT CALENDAR

DISTANCE

REGENT BUSINESS SCHOOL (RBS) - JANUARY 2021 25

lessor however if the vehicle is purchased outright, the maintenance cost will be R15 000 per year. The truck has a residual or salvage value of R50 000 after 5 years. The company uses the straight line method for depreciation.

Assume a tax rate of 30%.

Required:

2.3.1 Determine which option is better for AllOils Limited showing all workings.