You are trying to evaluate the economics of purchasing a van for your rental business. You expect the van to provide an annual after tax...

You are trying to evaluate the economics of purchasing a van for your rental business. You expect the van to provide an annual after tax cash benefit of Sh.240,000 and that you can sell it for Sh.160,000 after six years. All the funds for purchasing the van will come from your savings which are currently earning 14% return after taxes.

Required:
(i) Calculate the maximum price you would be willing to pay to acquire the van.
(ii) Assume that you are of good credit standing and if you choose you could
borrow the money to purchase the van instead of using your savings. You have
two alternative sources from which to borrow.
Alternative A:
From a finance company. The finance company requires you to make six
annual installments of Sh.244,787.15 each covering both interest and principal.
Alternative B:
From an insurance company. The insurance company requires you to make a
lump sum payment of Shs. 1,880,971.90 covering both interest and principal at
the end of six years.
Which alternative would you opt for?

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Kavungya answered the question on December 14, 2021 at 13:58

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