(Q.1) A manufacturing company wishes to acquire three heavy trucks that cost Rs 100,000 in total. A leasing company has offered to lease the trucks to a manufacturing company for a total Rs25,000 per year for each of the five years with lease payment payable in advance. To evaluate this option, manufacturing company depreciated the trucks via straight-line depreciation over theirfive-year normal recovery period and 8 percent investment tax credit is in effect. The marginal tax rate applicable is 40 percent and before tax cost of debt is 15%. If the trucks are leased, theITC will be passed on to the leasing company. Should the manufacturing company lease of purchase the trucks?

The manufacturing organization needs to gather 3 heavy vans that are valued Rs 1,00,000 in total.…

Answered: . Should the manufacturing company…

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. Should the manufacturing company lease of purchase the trucks?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

(Q.1) A manufacturing company wishes to acquire three heavy trucks that cost Rs 100,000 in total. A leasing company has offered to lease the trucks to a manufacturing company for a total Rs
25,000 per year for each of the five years with lease payment payable in advance. To evaluate this option, manufacturing company depreciated the trucks via straight-line depreciation over their
five-year normal recovery period and 8 percent investment tax credit is in effect. The marginal tax rate applicable is 40 percent and before tax cost of debt is 15%. If the trucks are leased, the
ITC will be passed on to the leasing company. Should the manufacturing company lease of purchase the trucks?

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Step 1: Calculate the net cost of purchasing the trucks

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Step 2: Calculate the present value of lease payments.

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