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Page17of27Learning Area 3.8: Question bankCapital BudgetingQUESTION 6(28 MARKS)LUXURY VEHICLES (PTY) LTDSOURCE: EXAM (2010)THE QUESTION CONSISTS OF TWO INDEPENDENT SECTIONSLuxury Vehicles (Pty) Ltd is a newly incorporated company that will hire out luxury vehicles tocorporate clients from 1 January 2011. Management is in the process of determining the all-inclusivedaily rental rate that will be charged in respect of their BMW1seriesvehicles. Management has indicatedthat they intend to charge a single all-inclusive daily rental rate that will result in them being in thesame cash position as their competitors.InPart Aof this question, management is looking specifically at the information of a competitor,namely Lavish Vehicles (Pty) Ltd, to gain information for their own purposes.InPart Bof this question, the information specific to Luxury Vehicles (Pty) Ltd will be addressed.Note the following will apply to both companies:The South African Revenue Service (SARS) allows an annual 20% taxation deduction in respect ofvehicles. You may assume that all income is taxable and all expenses tax deductible.A tax rate of30% per annum will apply. Tax will paid at the end of the year in which it is incurred.The cash flows of both companies will be evaluated using an after-tax cost of capital of 15 % perannum. You may also assume that all cash flows will occur at the end of the year (unless otherwiseindicated).PART A – LAVISH VEHICLES (PTY) LTD(21 MARKS)In order to determine a market-related daily rental rate, management obtained the following cashbudget of its main competitor. The cash budget that reflects the cash in- and outflows attributable toa BMW1seriesvehicle that will be hired out by Lavish Vehicles (Pty) Ltd from 1 January 2011:Cash budget for the year ended 31 December 2011NotesRandCost price of vehicle- Acquisition date:1 January 2011- Useful life of vehicle:5 years- Residual value at end of useful life:40 % of original cost price(R650 000)Rental income1R258 400Cost of fuel2(R10 200)Service cost3(R0)Tax paid(R35 460)R437 260

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