Explain the primary ways in which finance leases

Reference no: EM13182724

ABC Wines Company is considering the acquisition of a new irrigation system for its extensive vineyards. The system could either be bought outright for £10 million or via a finance lease requiring three annual payments in advance of £3.7 million. The leasing company is not the supplier or manufacturer of the equipment.

The new system is expected to give the following pre-tax net cash savings over the existing system in use:
Year Pre-tax net cash savings
1 £6 million
2 £5 million
3 £3 million

The system would require replacement in three years' time and have no residual value. The outright purchase would be financed by a loan with an interest rate of 8%.

Assume that corporation tax is charged at 25% and is payable one year in arrears. Writing down allowances is available on the depreciation of the equipment. The company uses the reducing balance method for depreciation at 25%. Lease payments are allowable for tax in full.

The company has no gearing at present and a cost of capital of 13%.

Complete the following:

1. Evaluate whether ABC Wines should go ahead with the installation of the new irrigation system and whether they should use the purchase or the lease option. (Tip: You should use NPV to perform the analysis; writing down allowances should be taken into consideration.)

2. Explain the primary ways in which finance leases differ from operating leases.

Reference no: EM13182724

Questions Cloud

State isolated in a gas containment bulb on a manifold : The volume of the bulb was 1.524 liters. The temperature was 28.40 C, and the manifold pressure was 637.6 torr. What volume, in liters, would this gas sample occupy at STP?

State the transversality conditions : State thes implified version of the problem in which the household chooses tomorrow's capital stock instead of today's investment .2 Given the Setup in 1.1, state the current value Lagrangian. .3 State the household's first-order conditions for cons..

Show the treatment of the lot in the income statement : Show the treatment of the lot in the income statement (result accounting) and balance sheet for the period 20x1 - 20X6.

State how much heat in kilojoules is evolved or absorbed : How much heat in kilojoules is evolved or absorbed in the reaction of 244.0g of calcium oxide with enough carbon to produce calcium carbide?

Explain the primary ways in which finance leases : Evaluate whether ABC Wines should go ahead with the installation of the new irrigation system and whether they should use the purchase or the lease option.

Acid-catalyzed dehydration of cyclobutylmethanol proceeds : Acid-catalyzed dehydration of cyclobutylmethanol proceeds via an E1 mechanism and gives two alkenes

Stimulate investment but leave ad unchanged : The economy has no unemployment and no inflation, but the government has determined that economic growth is too low and that the cause of this is a low level of investment. Using IS/LM, craft a set of policies that will stimulate investment BUT l..

Compute the concentration of hydronium ions : Calculate the concentration of hydronium ions [H3O+] from the measured pH values. Express your answer in two significant figures. Show your all work.

Cost of the property acquired by the new corporation : Specify the cost and ACB of the consideration received by Sidney, specify the PUC of the shares received by Sidney and indicate the cost of the property acquired by the new corporation.

User Account

All Pages