Europcar, a leading South African car rental company, wants to determine whether to purchase or lease a fleet of Toyota Yaris motorcars for rental purposes. The company is in the 28% tax bracket and its after-tax cost of debt is currently 7%. Lease contract
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
QUESTION 5.3
Europcar, a leading South African car rental company, wants to determine whether to purchase or lease a fleet of Toyota Yaris motorcars for rental purposes. The company is in the 28% tax bracket and its after-tax cost of debt is currently 7%.
Lease contract
The lease contract determines that the company could lease the fleet of Toyota Quest cars for three years at a lease rental of R295 000 payable at the end of each year. All maintenance costs would be paid by the lessor. Insurance and other costs would be borne by the lessee.
Purchase option
The purchase option allows the company to purchase the fleet of Toyota Quest cars for R900 000 and to finance it entirely with an 11% loan requiring annual end-of-year payment of R368 249 for three years. The fleet would be
Europcar’s
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Calculate the after-tax cash outflows for each year under the purchase alternative
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