Problem: A fishing company are considering the purchase of a new boat. The company is presently financed by a mix of 70% owners equity ad 30% debt, the after tax cost of capital is 12%. The details are as follows:
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Cost of boat
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$20000
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Useful life
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4 years
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Salvage value
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4000
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Depreciation method, down to zero book value
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Straight line
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Annual cash savings from boat, before tax and depreciation
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$10000
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Rate of interest on a 4 year term loan
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10% per annum
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Marginal tax rate
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47%
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Annual lease rentals (4 years) payable at the beginning of each year
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$6000
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Residual lease value
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$7000
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Annual operating expenses paid by lessor
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$1000
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1) Evaluate whether or not the truck acquisition is justified as an investment project.
2) Should the company lease the boat
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