AF208 MAJOR ASSIGNMENT SEMESTER 2, 2018
P a g e
’s Engineering Ltd need to acquire new equipment and it can either take a loan or have a
lease option. The loan funds of $100 000 at 8.2% p.a. after tax, compounded semi-annually for 2
years. The company has three directors in the business and they pay individual income tax at an
average rate of 35%. Inland Revenue Department (Tax office) allows depreciation at the rate of
50% p.a. on this equipment. Advise the company which is the better deal, the loan or a 2 year
lease with four equal payments of $26,674 starting with the first payment at the signing of the
contract. Assume that corporate tax rate is 28% for s
implicity’s sake the tax benefits from each
lease payment and the tax benefits forgone for depreciation are received without time lag in each
Which method of financing would you recommend? Why? (Hint: Show analysis of cash
List potential benefits associated with leasing?
Pacific Energy Ltd outlet has a throughput of 180 000 litres of Unleaded fuel each week.
Purchases are always made in multiples of 1000 litres. Holding costs including evaporation and
variation in volumes due to temperature changes are estimated to be $10 per 1000 litres.
Ordering costs are $1 per order.
What is EOQ, calculate on weekly data of Pacific Energy?
Given the circumstances above, do you believe Pacific Energy would keep strictly to the
EOQ with each order it submits to its suppliers? Why or why not? If you calculated the EOQ
on daily turnover data, what values must change to achieve the same EOQ as calculated on a
List some management techniques used by financial managers in Pacific Energy to assist in
inventory management? [Hint: Pacific Energy
’s inventory is the
What are the assumptions underlying economic order quantity (EOQ) theory? Relate it to
Pacific Energy Ltd.
Total marks: 20 marks
[Note: While answering, treat each part individually. Write an Essay format]