Reference no: EM133057216

Question 1 - Truck Ltd wants to buy a new truck. The cost of the truck is $80 000. The truck has a useful life of 8 years and is depreciated at $10 000 per year. The truck is expected to have a zero salvage value at the end of its useful life. The corporate tax rate is 20%. Truck Ltd is evaluating the two options below:

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

2. Truck 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 Truck Ltd the best option to finance the truck. Show all calculations. (25 marks)

Question 2 - John the CEO of A Ltd is thinking of replacing a dicing machine. A Ltd has a beta of 1.15 and 20-year government bonds are yielding 2%. The manufacturing stocks are returning a 4% return on average per year. A Ltd currently has a financial leverage of 30%, with total assets of $250 000. The debt is costing 8% per annum.

The old dicing machine cost $50 000; the new one will cost $30 000. The new machine will be depreciated to zero over 5-year life. It will be worth nothing after 5 years, but taxable dismantling costs of $9 000 will be incurred.

The old dicing machine is being depreciated at a rate of $ 5 000 per year. It will be completely written off in 5 years. If John does not replace it now, he will have to replace it in 5 years. John can sell it now for $12 000. In five years, it will probably be worth nothing.

The new machine will have a taxable savings of $6 000 per year in running cost. The corporate tax rate is 30 percent and tax is paid in the year of income.

Required - Should John purchase the new machine? Justify your answer and show all calculations.