Question 2 Dylan Thomas Ltd requested your advice regarding the proposed sale an
ID: 2336227 • Letter: Q
Question
Question 2 Dylan Thomas Ltd requested your advice regarding the proposed sale and leaseback of its main operations property. You agreed to forward to the Dylan Thomas Ltd's management your recommendation supported by adequate calculations based on following data. The property would be sold to Zarkava Ltd for $50,000,000. It would be leased back for $8,000,000 Tax deductible depreciation on the property is 4% per annum. per annum, payable in advance for five years. Both companies agree that the property would increase in value by 20% by the end of the lease contract. In five years' time the property would be sold for $60,000,000. The company income tax of 30% is payable in the year of income. Dylan Thomas Ltd's Cost of Capital is 12% after tax. Dylan Thomas Ltd would continue pay council rates and maintenance costs of $300,000 annually, which is exactly the amount it would be paying if it chose to retain the ownership by not entering in the proposed sale and leaseback contract.Explanation / Answer
Answer
NPV is positive, it is better to sale and lease back.
Year
Sale value
Lease back
Loss of depreciation deduction
Gain on sale
Council and maintenance
Total cashflow
Dis fat @12%
Dis cashflow
0
50000000
50000000
1
50000000
1
-5600000
-600000
0
-6200000
0.892857
-5535714
2
-5600000
-600000
0
-6200000
0.797194
-4942602
3
-5600000
-600000
0
-6200000
0.71178
-4413038
4
-5600000
-600000
0
-6200000
0.635518
-3940212
5
-5600000
-600000
-7000000
0
-13200000
0.567427
-7490034
NPV
23678400
After tax cost of lease back:-
Year
Lease rental
After tax (1-0.30)
1
8000000
5600000
2
8000000
5600000
3
8000000
5600000
4
8000000
5600000
5
8000000
5600000
Depreciation deduction per year is 4%
Property value
50000000
Depreciation rate
4%
Depreciation
2000000
Tax Rate 30%
600000
Sale after 5 years
Sale value after 5 years
60000000
Value at today
50000000
Gain
10000000
Tax @30%
3000000
After tax gain
7000000
Year
Sale value
Lease back
Loss of depreciation deduction
Gain on sale
Council and maintenance
Total cashflow
Dis fat @12%
Dis cashflow
0
50000000
50000000
1
50000000
1
-5600000
-600000
0
-6200000
0.892857
-5535714
2
-5600000
-600000
0
-6200000
0.797194
-4942602
3
-5600000
-600000
0
-6200000
0.71178
-4413038
4
-5600000
-600000
0
-6200000
0.635518
-3940212
5
-5600000
-600000
-7000000
0
-13200000
0.567427
-7490034
NPV
23678400
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