CIMAPRA19-F03-1 Exam - Topic 6 Question 32 Discussion

Question

A companyplansa four-year projectwhichwill be financed by either an operatinglease or a bank loan.

Lease details:

* Four year lease contract.

* Annual leaserentalsof $45,000, paidin advance on the 1st day of the year.

Other information:

* Theinterest rate payable on thebank borrowing is 10%.

* The capital cost of the project is $200,000 which would have to be paid at the beginning of the first year.

* A salvage or residual value of $100,000 is estimated at the end of the project's life.

* Purchased assets attract straight linetax depreciation allowances.

* Corporate income taxis 20% andis payable at the end of the year following the year to which it relates.

A lease-or-buy appraisal is shown below:

Which THREE of the following items areerrorswithin the appraisal?

Kattie · Accepted Answer

B) Tax relief on lease payments have not been lagged correctly and C) Using the 10% discount rate is incorrect and F) The salvage value has been included within the lease option

Kattie · Answer

A) Lease payments are timed incorrectly

Kattie · Answer

D) The project's operating cashflows should be included

Kattie · Answer

E) The bank loan repayments should be included