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The Promoter Chairperson of a leading Jewellery chain in Kerala had recently procured a Corporate...

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Accounting

  1. The Promoter Chairperson of a leading Jewellery chain in Kerala had recently procured a Corporate Jet. The purchase price of the Jet is $ 300 million and the pre-tax operational costs of the Jet is $ 50 million per annum. The management of the firm estimates that this asset will be under-utilized. The Jet can be used to fly the management also for important meetings in Mumbai and Delhi, which will reduce the current travel expenses of the management by $ 40 million. However, flying the management along with Chairperson would result in an additional pre-tax operational cost of $ 30 million per annum for the Jet. The management also estimates that this additional activity of flying the management team would force the Jet to be replaced in three years rather than four years, when used only by the Chairperson. Beyond its useful life, the Jet can be sold for $ 100 million, in both the scenarios. The use of corporate Jet is indispensable for the firm and will continue in the future. Assuming the Jet be depreciated using the straight line method to zero book value in both cases, the opportunity cost of capital to be 10%, the corporate tax rate to be 20%, which option should the firm choose?

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