SA SA INTERNATIONAL HOLDING LIMITED Sa Sa International Holding Limited (the \"C

Question

SA SA INTERNATIONAL HOLDING LIMITED Sa Sa International Holding Limited (the "Company"), stock code O178, is a listed com pany in the Hong Kong Stock Exchange Market. The Company is engaged in wholesale and retail of cosmetic products. Assume the directors, Dr. Simon Kwok and Dr. Eleanor Law, have decided to expand its business and have liaised with the vendor, Ray Equipment, for a quotation. Ray Equipment has agreed to sell the equipment at a price of HKS3.8 million, at three-year MACRS depreciation. At the end of year four, the market value of the equipment is expected to be HK$250,000. Alternatively, the Company can lease the equipment from Ben Equipment Leasing. The lease agreement requires the lessee (the Company) to make four annual payments of HK$990,000, due at the beginning of each year; and the deposit of HKS200,000 will only be returned to the Company at the end of the lease term. The Company may issue bonds with the 11.5 percent yield rate, and the tax rate is 17 percent.

Explanation / Answer

Soln : We are considering here the MACRS depreciation, So, depreciation % will be for equipment and it will be 33.33% in 1st year, 44.45% in 2nd, 14.81 in 3rd and 7.41 in 4th year

We have used 0.25 million as salvage value instead of $1.5 million given in Q4

Please refer the table we have used the depreciation:

For leasing option NPV = 3028172/1000000 = 3.03 million lower than the purchasing option

Hence, we suggest to the company to lease the equipment.

Year 0 1 2 3 4 Initial outlay 3.8 Depreciation 1.26654 1.6891 0.56278 0.28158 Tax shield from depreciation 0.215312 0.287147 0.095673 0.297869 PV of shield 0.193105 0.230969454 0.069018 0.192719 NPV (Initial Outlay - PV of tax shields) 3.1141884 Leasing Payment 1780000 1780000 PV using 11.5% as return 1596413 1431760.14 NPV 3028172.7

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