Calculate the cost of owning against the cost of leasing

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Reference no: EM133382603

Case Study: TK Travel (Pty) Ltd is considering the purchase of a tanker for R400 000 cash or lease the tanker. This will be a 5-year lease/contract and it will require a down payment of R100 000 and further payments of R100 000 per year at the end of each year. If the tanker is owned, the service and maintenance charges will be R15 000 pa, (er annum) but if the tanker is leased these charges is carried by the lessor. The salvage value of the tanker in 5 years' time is expected to be R40 000. The company uses the straight-line method of depreciation. The prevailing tax rate is 27% and the after-tax cost of debt is 10%.

Required:

Calculate the cost of owning against the cost of leasing and advise on the best option. Justify your answer.

Reference no: EM133382603

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