Table Mountain Tours (Pty) Ltd is considering investing in a new cable car. The company can

either borrow the funds required to purchase the cable car, or it can enter a finance lease with

a reputable finance house. The current tax rate is 28% and tax is payable in the year that it is

incurred. The South African Revenue Services (SARS) will allow lease, interest and

maintenance costs to be deducted for tax purposes. Assume that Table Mountain Tours (Pty)

Ltd has sufficient taxable income to ensure that all deductions can be made immediately (i.e.

there is no assessed loss).

Lease option:

Finance lease payments of R90 000 per year, payable in arrears, will need to be made for a

period of 5 years. Table Mountain Tours (Pty) Ltd will be responsible for maintenance costs of

R50 000 per year, beginning in year 2.

Purchasing option:

The company can borrow the funds required to purchase the cable car by obtaining a 5-year

loan from Absa Bank at an interest rate of 10%. The new cable car can be purchased at a cost

of R400 000. Table Mountain Tours (Pty) Ltd will qualify for a wear-and-tear allowance of 25%

per year on the straight-line method from SARS. The estimated residual value of the asset at

the end of 5 years is R60 000. Table Mountain Tours (Pty) Ltd will be responsible for

maintenance costs of R50 000 per year, beginning in year 2.

REQUIRED

Evaluate whether Table Mountain Tours (Pty) Ltd should borrow the funds from Absa Bank and

purchase the asset or lease the asset from a finance house.