QUESTION ONE Nyla Boilers is considering the acquisition of a new CNT machine for their operations. The machine...

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Finance

QUESTION ONE
Nyla Boilers is considering the acquisition of a new CNT machinefor their operations. The
machine may be purchased outright or leased.
The Purchase Option
Cash purchase R600 000
Annual software R10 000
Maintenance Costs
Year 1 and Year 2 R5000 per year
Year 3 R 9000
Year 4 R20 000
The machine will be sold after 4 year for 15% of its cashpurchase price.
The Leasing Option
An initial deposit of R80 000 is required and the lease will runfor 4 years. Annual payments of
R120 000 need to be made at the end of each of the four years. Onexpiry of the 4th year the
deposit will be refunded. No other costs will be borne by NylaBoilers.
The rate of return is 7%
Tax rate: 30%
Required:
1.1 Determine the present value of cash flows associated with eachalternative. (22)
1.2 Which option will you recommend to Nyla Boilers. (3)

Answer & Explanation Solved by verified expert

3.5 Ratings (395 Votes)

11 Lets evaluate both options Assumption Purchase Option Book value of machine after 4 years is more than the resale value 15 so no tax liability arises Lease Option Machine is not See Answer

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QUESTION ONENyla Boilers is considering the acquisition of a new CNT machinefor their operations. Themachine may be purchased outright or leased.The Purchase OptionCash purchaseR600 000Annual softwareR10 000Maintenance CostsYear 1 and Year 2R5000 per yearYear 3R 9000Year 4R20 000The machine will be sold after 4 year for 15% of its cashpurchase price.The Leasing OptionAn initial deposit of R80 000 is required and the lease will runfor 4 years. Annual payments ofR120 000 need to be made at the end of each of the four years. Onexpiry of the 4th year thedeposit will be refunded. No other costs will be borne by NylaBoilers.The rate of return is 7%Tax rate: 30%Required:1.1 Determine the present value of cash flows associated with eachalternative. (22)1.2 Which option will you recommend to Nyla Boilers. (3)

Cash purchase	R600 000
Annual software	R10 000
Maintenance Costs
Year 1 and Year 2	R5000 per year
Year 3	R 9000
Year 4	R20 000