Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Larine Industries wants an airplane available for use by its corporate staff. The airplane that the company wishes to acquire, a Superjet 25, can be

Larine Industries wants an airplane available for use by its corporate staff. The airplane that the company wishes to acquire, a Superjet 25, can be either purchased or leased from the manufacturer.

Larine Industries cost of capital is 20% and the tax rate is 30%.

The company has made the following evaluation of the two alternatives:

Purchase alternative: R
Purchase cost price 2 550 000
Annual cost of servicing and licence 27 000
Annual depreciation 50 000
Repairs:
First three years, per year 9 000
Forth year 15 000
Fifth year 30 000

Lease alternative: If the Supejet 25 is leased, then the company would have to make an immediate deposit of R150 000 to cover any damage during use. The lease would run for five years, at the end of which time the deposit would be refunded.

The lease would require an annual rental payment of R600 000 at the end of each year. As part of the lease cost, the manufacturer would provide all servicing and repairs.

At the end of the five-year period, the plane would revert to the manufacturer, as owner.

Required:

3.1 Calculate the total after-tax cost of the present values of the cash flows associated with each alternative. (17)

3.2 Which financial alternative would you recommend that the company accept? Why? (3)

3.3 Discuss any five (5) reasons for leasing assets rather than owning them. (5)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Probability For Risk Management

Authors: Matthew J. Hassett, Donald G. Stewart

2nd Edition

156698548X, 978-1566985482

More Books

Students also viewed these Finance questions