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Tamilore Limited (TL) is an agro-based firm, specializing in yam and rice production in Benue State of Nigeria. One of the harvesters is due to be replaced on November 30, 2018, the last day of TL’s current financial year. An investment appraisal exercise has recently been completed which confirmed that it is financially beneficial to replace the machine at this point. TL is now considering how best to finance the acquisition of the harvester to be replaced. TL is already highly geared.
A government development agency has offered the following two alternative methods of financing the machine:
Alternative 1
A loan of N49,200,000 at 6% interest rate to buy the machine on November 30, 2018. If this option is selected, the machine will be depreciated on a straight-line basis over its estimated useful life of 5 years.
Alternative 2
Enter into a finance lease. This will involve payment of annual rental of N12 million with the first payment due on November 30, 2019. The lease payments will be for the entire estimated useful life of the machine, which is 5 years, after which ownership will pass to TL without further payment.
Other information
(i) Whether leased or purchased outright, maintenance would remain the responsibility of TL and would be N450,000 payable annually in advance.
(ii) TL is liable to tax at a rate of 25%, payable annually at the end of the year in which the tax charge or tax saving arises.
(iii) TL is able to claim capital allowances on the full capital cost of the machine in equal installments over the first four years of the machine.
(iv) Assume that TL has sufficient taxable profits to benefit from any savings arising therefrom.
(v) All workings in N’000.
Required:
a. Show that the implied interest rate in the lease agreement is 7%. (3 Marks)
b. Advise, using present value method, whether Tamilore Limited should borrow to buy the machine or lease it. (12 Marks)
c. Instead of lease financing, one director has suggested an equivalent Islamic finance.
i. Explain briefly the principles of Islamic finance. (2 Marks)
ii. Explain three main advantages of Islamic finance. (3 Marks)
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Rahim Ltd requires a machine for 5 years. There are two alternatives, either to take it on lease or buy basis. The company is reluctant to invest an initial amount for the project and approaches their bankers. The bankers are ready to finance 100% of its initial required amount at a 15% rate of interest for any of the alternatives.
Under lease option, an upfront security deposit of GH¢5,000,000 is payable to the lessor, which is equal to the cost of the machine. Out of which, 40% shall be adjusted equally against annual lease rent. At the end of life of the machine, the expected scrap value will be at book value after providing depreciation at 20% on written down value basis.
Under the buying option, loan repayment is in equal annual installments of the principal amount, which is equal to annual lease rent charges. However, in the case of bank finance for the lease option, repayment of principal amount equal to lease rent is adjusted every year, and the balance at the end of 5th year.
Assume income tax rate is 30%, interest is payable at the end of every year, and discount rate at 15% p.a. The following discounting factors are given:
| Year | Factor |
|---|---|
| 1 | 0.8696 |
| 2 | 0.7562 |
| 3 | 0.6576 |
| 4 | 0.5718 |
| 5 | 0.4972 |
Required:
Recommend the most viable option on the basis of net present values.
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K-Force Ltd, a newly established security company, has constituted its first board of directors. The directors are expected, among others, to take financial decisions in the areas of investment, financing, and dividend payment. A consultancy firm has been engaged to run an orientation program for the directors in the coming week.
You work with the consultancy firm that has been engaged to run the orientation program for the new directors. You have been asked by your boss to prepare briefing notes on the specific roles the directors are expected to play in the three fundamental decision areas and the constraints that government policies might impose on them.
Required:
Prepare a briefing note on the nature of the three fundamental decision areas. Specifically, the briefing notes should cover the objective of each class of decision; TWO (2) specific decisions the directors are expected to take in each class of financial decisions; and TWO (2) factors in the external environment they should consider when making financial decisions.
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Find Related Questions by Tags, levels, etc.
Tamilore Limited (TL) is an agro-based firm, specializing in yam and rice production in Benue State of Nigeria. One of the harvesters is due to be replaced on November 30, 2018, the last day of TL’s current financial year. An investment appraisal exercise has recently been completed which confirmed that it is financially beneficial to replace the machine at this point. TL is now considering how best to finance the acquisition of the harvester to be replaced. TL is already highly geared.
A government development agency has offered the following two alternative methods of financing the machine:
Alternative 1
A loan of N49,200,000 at 6% interest rate to buy the machine on November 30, 2018. If this option is selected, the machine will be depreciated on a straight-line basis over its estimated useful life of 5 years.
Alternative 2
Enter into a finance lease. This will involve payment of annual rental of N12 million with the first payment due on November 30, 2019. The lease payments will be for the entire estimated useful life of the machine, which is 5 years, after which ownership will pass to TL without further payment.
Other information
(i) Whether leased or purchased outright, maintenance would remain the responsibility of TL and would be N450,000 payable annually in advance.
(ii) TL is liable to tax at a rate of 25%, payable annually at the end of the year in which the tax charge or tax saving arises.
(iii) TL is able to claim capital allowances on the full capital cost of the machine in equal installments over the first four years of the machine.
(iv) Assume that TL has sufficient taxable profits to benefit from any savings arising therefrom.
(v) All workings in N’000.
Required:
a. Show that the implied interest rate in the lease agreement is 7%. (3 Marks)
b. Advise, using present value method, whether Tamilore Limited should borrow to buy the machine or lease it. (12 Marks)
c. Instead of lease financing, one director has suggested an equivalent Islamic finance.
i. Explain briefly the principles of Islamic finance. (2 Marks)
ii. Explain three main advantages of Islamic finance. (3 Marks)
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Rahim Ltd requires a machine for 5 years. There are two alternatives, either to take it on lease or buy basis. The company is reluctant to invest an initial amount for the project and approaches their bankers. The bankers are ready to finance 100% of its initial required amount at a 15% rate of interest for any of the alternatives.
Under lease option, an upfront security deposit of GH¢5,000,000 is payable to the lessor, which is equal to the cost of the machine. Out of which, 40% shall be adjusted equally against annual lease rent. At the end of life of the machine, the expected scrap value will be at book value after providing depreciation at 20% on written down value basis.
Under the buying option, loan repayment is in equal annual installments of the principal amount, which is equal to annual lease rent charges. However, in the case of bank finance for the lease option, repayment of principal amount equal to lease rent is adjusted every year, and the balance at the end of 5th year.
Assume income tax rate is 30%, interest is payable at the end of every year, and discount rate at 15% p.a. The following discounting factors are given:
| Year | Factor |
|---|---|
| 1 | 0.8696 |
| 2 | 0.7562 |
| 3 | 0.6576 |
| 4 | 0.5718 |
| 5 | 0.4972 |
Required:
Recommend the most viable option on the basis of net present values.
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K-Force Ltd, a newly established security company, has constituted its first board of directors. The directors are expected, among others, to take financial decisions in the areas of investment, financing, and dividend payment. A consultancy firm has been engaged to run an orientation program for the directors in the coming week.
You work with the consultancy firm that has been engaged to run the orientation program for the new directors. You have been asked by your boss to prepare briefing notes on the specific roles the directors are expected to play in the three fundamental decision areas and the constraints that government policies might impose on them.
Required:
Prepare a briefing note on the nature of the three fundamental decision areas. Specifically, the briefing notes should cover the objective of each class of decision; TWO (2) specific decisions the directors are expected to take in each class of financial decisions; and TWO (2) factors in the external environment they should consider when making financial decisions.
Find Related Questions by Tags, levels, etc.
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