## Cs001 Assignment 1 Solution 2015 Tax

#### ACC501 Assignment Deadline:

- Make sure to upload the solution file before the due date on VULMS.
- Any submission made via email after the due date will not be accepted.

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#### ACC501 Assignment Rules for Marking:

Please note that your assignment will not be graded or graded as Zero (0), if:- It is submitted after the due date.
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#### ACC501 Assignment Learning Objectives:

After attempting this assignment, you will be able to:- Understand the different capital budgeting techniques.
- Calculate projected net cash flows by considering the effect of depreciation and taxes.
- Evaluate any proposed project by using different capital budgeting techniques.
- Derive inferences after critical analysis regarding the acceptance/rejections of the project.

### The Case:

Mr. Imran wants to establish a business of manufacturing spare parts of 70cc motorcycle. He estimates a start-up cost of business with heavy machinery of worth Rs. 30 million. He further projects that the revenue (before tax and depreciation) from the business will be Rs. 8 million for the first year and it will keep on growing at a rate of 4% annually up to year 6. Some other information regarding the project is as follows:The machinery is fully depreciated under the straight-line method till the end of year 6.

Cost of capital is 8% while the tax rate is 40%.

As per an estimate, the machinery dismantling and the site restoration would require an outlay of Rs. 5 million; while the machinery would not be able to fetch any sale price.

Being a financial consultant of Mr. Imran, you have to conduct a feasibility analysis for his project. You have to suggest Mr. Imran about the viability of the project after performing different Capital Budgeting techniques.

#### ACC501 Assignment **Requirement:**

Keeping your task into consideration, provide answers to the following:- Calculate projected net cash flows for 6 years. (10 Marks)

- Payback Period (The desired payback period is 4 years) (04 Marks)
- Net Present Value (8 Marks)
- Profitability Index (03 Marks)
- Comments if there is any difference in the results among the above used techniques? Would you recommend Mr. Imran to start his business based upon your analysis? (05 Marks)

**Special Note:**

Complete calculations are required for Part (1) and Part (2). Incomplete calculations will result in loss of marks.

**Recommended**: ACC501 BUSINESS FINANCE COURSE CONTENTS

### ACC501 Assignment No 1 Solution Fall 2017

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AP/ADMS 4540 Assignment #2 Answer Key Winter 2016 Question 1 Leasing (20 marks) Your firm needs to either buy or lease $230,000 worth of vehicles. These vehicles have a life of 4 years after which time they are worthless. The vehicles belong in CCA class 10 (a 30% class) and can be leased at a cost of $68,000 a year for the 4 years. The corporate tax rate is 34% and the cost of debt is 10%. There are many more assets in this asset class. The lease payments are made at the beginning of the period. The half year rule is applicable. a) What is the after-tax cost of debt? (1 mark) b) Wh at is the amount of the after-tax lease payment? (1 mark) c) What is the present value of the depreciation tax shield? (1 mark) d) What is the net advantage to leasing? (2 marks) e) The lessor in this case has a tax rate of 35%. What is the net advantage of leasing to the lessor? (4 marks) f) What is the amount of the break-even lease payment to the lessee? (4 marks) g) What is the amount of the breakeven to the lessor? (3 marks) h) Is a lease feasible? (2 marks) i) What should be the tax rate of the lessor so that a lease is feasible? (2 marks) Solution a) After tax discount rate = 10% x (1-0.34)= 6.6% (1 mark) b) After tax lease payment = 68,000 x (1-.34)= $44,880 (1 mark) c) PVCCATS =230,000x 0.3x 0.34 / (0.066+0.30)x (1+0.5x0.066)/(1+0.066) = $62,114.08 (1 mark) d) PV of lease payments = 44,880 x PVIFA (6.6%, 4)=$163,525.38 (1 mark) NAL=230,000 - 62,114.08 -163,525.38 = $4360.54 (1 mark) e) After tax discount rate = 10% x (1-0.35) = 6.5% (1 mark) PVCCATS =230,000 x 0.3 x 0.35 / (0.065+0.30) x (1+0.5x0.065)/(1+0.065) = $64,145 (1 mark) After tax lease payments = 68,000 x (1-.35) = $44,200 PV of lease payments = 44,200 x PVIFA (6.5%, 4) =$161,262.62 NAL (lessor) = -230,000 + 161,262.62 + 64,145 = -$4,592.38 (2 marks) f) NAL = 0 = 230,000-62,114- X x PVIFA (6.6%, 4) X= $45,378.63 (1 mark) Before tax payment = 45,387.63 / (1-0.34) = $69,813 (1 mark)

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