Question 2 (6 marks)
Sonic Transport Pty Ltd, a privately owned, medium-sized logistics provider, is considering the possibility of leasing a $492,000 truck-servicing facility. This facility cleans and services commercial road vehicles used on long-haul trips. A financing company has offered to structure a finance lease with the first payment of $90,000 due today and with a further 4 instalments of $90,000 at the beginning of each of the next four years. According to the lease agreement, Sonic has the option to purchase the facility at $115,000 at the end of the lease in 5 years time. Alternatively, Sonic Transport can obtain a loan at an interest of 12% p.a. (before tax) to buy the facility. If bought, the facility then has to be depreciated at a prime cost rate of 20% over a useful life of 5 years. After the 5 years, the facility is estimated to have a salvage value of $150,000. Sonic is subject to a 30% tax rate. Any tax benefits (received or foregone) would be incurred at the end of the year of income.
Advise Sonic on the following:
a. Using an acceptable DCF technique, should the business lease or buy the facility? (5 marks)
b. Can Sonic use promissory notes or other forms of short-term funds to finance the truck-servicing facility? (1 marks)
Limit response your response to two A4 pages. Ensure that it is clear how figures are calculated.
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