Page 92 - Microsoft Word - 00 ACCA F9 IWB prelims 2017.docx

Chapter 5

Question 1

PV of a lease

A company has already decided to accept a project and is now considering how
best to finance it.

The asset needed for the project could be leased over five years at a rental cost
of $14,000 per annum with the first payment due immediately (at the start of an
accounting period).

Tax is payable at 30%, one year in arrears. The post-tax cost of borrowing is
8%.

Calculate the net present value of the leasing option.

Time Cash flow ($) annuity factor PV ($)
t0 – t4 (14,000) (1 + 3.312) (60,368)

t2 – t6 4,200 3.993 × 0.926 15,530

NPV (44,838)
The lease payments are an advanced annuity starting at t0.

The tax payments are a delayed annuity. The first tax computation will be done
in 1 year at the end of the accounting period and the first tax saving on the
lease payments will be one year in arrears at t2.

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