Question 2 (54 Marks) HTM Helicopter Tours Polokwane (Pty) Ltd (hereafter called "HTM" or "the company") is a Polokwane-based aviation company that specializes in the provision of helicopter services in South Africa. The company was formed in 2012 by two former South African Airways pilots, Nditsheni Ndou and Marie van Wyk. The two have remained as the company's only shareholders and directors with Ms van Wyk serving as its managing director. HTM started off with one helicopter and has since grown rapidly and now operates a fleet of 6 helicopters. The company's services include safaris, helicopter tours and adventure tourism for holiday makers and honeymooners. HTM also provides commercial services which include charter flights for business executives, mining support, aerial crane services, filming, emergency support, asset patrols and fuel tank. The company offers these services to both local and international customers. Its international customers mainly come from The Netherlands, Germany, the United Kingdom and the United Sates. The company's turnover and profit after-tax for the year ended 30 June 2017 were R480 million and R38.40 million respectively. New Domestic Operator's Permit In July 2017, the South African government granted HTM a Domestic Operators Permit that allows it to operate flights from Johannesburg and Polokwane to all South African national parks. The licence is effective from 01 January 2018 and expires on 31 December 2022. The directors of HTM are excited about this new development and are considering acquiring a used H145 Airbus Helicopter to service these routes. This helicopter model has a sitting capacity of 8 passengers and is renowned for its comfort, safety, reliability, low cost of operation and high fuel efficiency. The helicopter will be imported from Airbus, France, and Airbus has quoted a price of 1 150 000 for it. The quoted price is inclusive of delivery charges and customs duties, and is valid until 31 December 2017. The company's financial director has recommended the acquisition of the helicopter as the project's net present value is positive. HTM is now considering how to finance the acquisition of the helicopter and the financial director has tabled the following two financing options.

Option 1: Loan facility HTM can borrow and purchase the helicopter. The company's bankers, Nedbank Limited, has offered it a five-year loan facility of R17 825 000 at a pre-tax rate of 12.50% per annum with the principal repayable at the end of the loan term. The residual value of the helicopter at the end of year 5 is expected to be R5 348 000. The pre tax cost of debt is the same as the interest rate on loan.

Option 2: Finance lease As an alternative to purchasing the helicopter, Rand Merchant Bank's aircraft leasing division has offered HTM a finance lease over five years at R5 120 000 per year payable in advance with a residual payment of R4 980 000 at the expiry of the lease term. The bank has indicated that this offer is valid until 31 December 2017. The lease payments are inclusive of a maintenance cost of R1 350 000 per annum.

Other information: The R/ exchange rate as at 01 September 2017 is R15.50/ (1= R15.50). HTM's after-tax nominal weighted average cost of capital is 15.50% per annum. The company's corporation tax rate is expected to be 29% per annum for the foreseeable future, and it can be assumed that tax liabilities are payable at the end of the accounting year to which they relate. If purchased, the helicopter will qualify for a tax depreciation allowance of 20% per year, straight line, as per S11 (e) of the Income Tax Act. HTM estimates that maintenance costs will remain the same regardless of the finance method used to acquire the helicopter. Tax rate is 29%.

Required: 2.1 Determine whether HTM should lease or borrow and purchase the helicopter. (30 marks)