2. The company "Bom investor, Lda" needs to replace a heavy vehicle for which it has two alternatives: rent or purchase. In the case of acquisition, the price of the vehicle is €140,000, depreciated on a straight-line basis at the rate of 25% per year. After 4 years, the company plans to sell the vehicle for €30,000. In return for the acquisition, the rental implies the payment of semi-annual installments in arrears, the first rent of €15,000 and the rest subject to an update of 10% per year. a) Assuming an 8% discount rate and a 21% tax rate, which of the two options is the most favorable - rent or purchase? b) If the company in question expected losses for the next four years, to what extent would that affect decision analysis?
2. The company "Bom investor, Lda" needs to replace a heavy vehicle for which it has two alternatives: rent or purchase. In the case of acquisition, the price of the vehicle is €140,000, depreciated on a straight-line basis at the rate of 25% per year. After 4 years, the company plans to sell the vehicle for €30,000. In return for the acquisition, the rental implies the payment of semi-annual installments in arrears, the first rent of €15,000 and the rest subject to an update of 10% per year. a) Assuming an 8% discount rate and a 21% tax rate, which of the two options is the most favorable - rent or purchase? b) If the company in question expected losses for the next four years, to what extent would that affect decision analysis?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:2. The company "Bom investor, Lda" needs to replace a heavy vehicle for which it has two
alternatives: rent or purchase.
In the case of acquisition, the price of the vehicle is €140,000, depreciated on a straight-line basis at the rate of 25% per year.
After 4 years, the company plans to sell the vehicle for €30,000.
In return for the acquisition, the rental implies the payment of semi-annual installments in arrears, the
first rent of €15,000 and the rest subject to an update of 10% per year.
a) Assuming an 8% discount rate and a 21% tax rate, which of the two options is
the most favorable - rent or purchase?
b) If the company in question expected losses for the next four years, to what extent would that affect
decision analysis?
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