a) A local taxi company requires another vehicle and is unsure whether to lease
ID: 337879 • Letter: A
Question
a) A local taxi company requires another vehicle and is unsure whether to lease or buy. The purchase cost of the cab is £20000 and it is expected to produce net income (after deduction of all operating expenses) of £6000 per year. The vehicle will be in service for 6 years, after which it will be sold via auction, and the expected proceeds at today's value is £2500. If the cab were to be leased, the annual charge would be £4000. The cost of capital is 10%. Should the company buy or lease? 120 marks] b) What other considerations might influence the decision? [5 marksExplanation / Answer
a) A local taxi company requires another vehicle and is unsure whether to lease or buy. The purchase cost of the cab is £20000 and it is expected to produce net income (after deduction of all operating expenses) of £6000 per year. The vehicle will be in service for 6 years, after which it will be sold via auction, and the expected proceeds at today's value is £2500. If the cab were to be leased, the annual charge would be £4000. The cost of capital is 10%. Should the company buy or lease? 120 marks] b) What other considerations might influence the decision? [5 marks
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