Question 2

Zenco Ltd wants to buy a new Car. The cost of the Car is $80 000. The Car has a useful life of 8 years and is depreciated at $10 000 per year. The Car is expected to have a zero salvage value at the end of its useful life. The corporate tax rate is 20%. Zenco Ltd is evaluating the two options below:

1. Zenco Ltd can get a bank loan at 8% interest per annum after tax.

2. Zenco Ltd is also offered a lease finance option with Toyota, with 4 annual payments of $30 000 to start 4 years from the day the lease is signed.

Required:

Advice Zenco Ltd the best option to finance the Car. Show all calculations. (25 marks)