aa ‘cat renal colpany i consideting sein up 2 division co provide chaleur deve limousines for weddings and other eet [The proposed invesmenc wl include the purchaze ofa et of 20 limousines ts cost of$200000 cach Iris etree tha lrmousines wil have wel ifeof five yeus and a resale vlue of $300000 each st he end of their usefllfe'The company the straight line method of depreciation Revenue and variable costs Each limousine willbe hired to customers fr $600 pe day. The variable css, including fuel, cleaning and the chauffeurs ‘wages, will be $300 per day. The limousines wil be available for hire 350 days $2 2 $20.000 ro estimate che demand forthe limousines in Year 1. The madet specials extimaced that each limousine wil he mumber of days hiv wl increase by ten days each year forthe remaining lial be hized for 260 day in Year and thar the projec. Fined cosss ofthe year A matker specialise was hired ata) Each limousine wl incus Raed costs, including maitenance and depreciation of $4500 year. The adminiartion of be.” lvision is expected to cost $300 000 each year The garaging ofthe limousines will will wie esting facies foe which chee is no other ute. The head office will of sales revenue for che use of chese flies. “anion ‘not requite any additional investment ht charge the division an annual fee of 10 pe ei, “The company’ financial direcor has provided the following taxation information: + Tex deprecation: 25 per oene per annum of the reducing balance, witha balancing adjustment inthe year of disposal. The limousines will be eligible for tax depreciation, + Tein rte: 30 per cent of taxable profits. Half ofthe tax ie payable inthe year in which i arses, che balance i pid in the filling yea Ober nfonsation Igporinftion “Thecompany uses 2 cos of capil of 12 pec cen per annum ro evaluate projees of his typ Regine: (a) Brluate whether che company should go ahead with che projees You should use nec present vale asthe basis of your (04 riarky) a ‘is decid er it should replace ke compan il crying outa eview of exiting cel busine The company deciing whthe shold ee ee ‘Theestinated relevant cash flows forthe theee pasile options foreach car can be abeained from the following infotmation: Trees. Cah outflows $ 0 (0000) 1 (1500) 2 (2700) aut (600) The company uses a cost of capital of 12 per cent for decisions ofthis type. Reyurede Residual value $ 21000 415000 3000 () Caealae, wing the annualized equivalent method, whether the eas should be replaced after one, eo or thee yer You should ignore taxation and inflation. (7 marks) (6. Biplain she limisatione ofthe atilized equivalent method for making decisions ro replace non-cusrent assets marks) Clonal 25 mark)