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ARQ Ltd is an Indian company based in Greater Noida, which manufactures packaging materials for food items.  The company maintains a present fleet of five fiat cars and two Contessa Classic cars for its chairman, general manager and five senior managers.  The book value of the seven cars is Rs. 20, 00,000 and their market value is estimated at Rs. 15, 00,000.  All the cars fall under the same block of depreciation @ 25 per cent.


  A German multinational company (MNC) BYR Ltd has acquired ARQ Ltd in all cash deal.  The merged company called BYR India Ltd is proposing to expand the manufacturing capacity by four folds and the organization structure is reorganized from top to bottom.  The German MNC has the policy of providing transport facility to all senior executives (22) of the company because the manufacturing plant at Greater Noida was more than 10 kms outside Delhi where most of the executives were staying.

Manager (10) Santro King Rs.    3,75,000
DGM and GM (5) Honda City           6,75,000
Director (5) Toyota Corolla           9,25,000
Managing Director (1) Sonata Gold          13,50,000
Chairman (1) Mercedes benz          23,50,000

Prices of the cars to be provided to the Executives have been as follows:

The company is evaluating two options for providing these cars to executives

Option 1 : The company will buy the cars and pay the executives fuel expenses, maintenance expenses, driver allowance and insurance (at the year – end).  In such case, the ownership of the car will lie with the company.  The details of the proposed allowances and expenditures to be paid are as follows:

  1. a) Fuel expense and maintenance Allowances per month
Particulars Fuel expenses Maintenance allowance

DGM and GM


Managing Director


Rs.    2,500





Rs.    1,000





  1. b) Driver Allowance: Rs. 4,000 per month (Only Chairman, Managing Director and Directors are eligible for driver allowance.)
  2. c) Insurance cost: 1 per cent of the cost of the car.


The useful life for the cars is assumed to be five years after which they can be sold at 20 per cent salvage value.  All the cars fall under the same block of depreciation @ 25 per cent using written down method of depreciation.  The company will have to borrow to finance the purchase from a bank with interest at 14 per cent repayable in five annual equal instalments payable at the end of the year.


Option 2 : ORIX, The fleet management company has offered the 22 cars of the same make at lease for the period of five years.  The monthly lease rentals for the cars are as follows (assuming that the total of monthly lease rentals for the whole year are paid at the end of each year.


Santro Xing                                                     Rs.  9,125

Honda City                                                           16,325

Toyota Corolla                                                        27,175

Sonata Gold                                                            39,250

Mercedes Benz                                                       61,250

Under this lease agreement the leasing company, ORIX will pay for the fuel, maintenance and driver expenses for all the cars.  The lessor will claim the depreciation on the cars and the lessee will claim the lease rentals against the taxable income.  BYR India Ltd will have to hire fulltime supervisor (at monthly salary of Rs. 15,000 per month) to manage the fleet of cars hired on lease. The company will have to bear additional miscellaneous expense of Rs. 5,000 per month for providing him the PC, mobioe phone and so on.

The company’s effective tax rate is 40 per cent and its cost of capital is 15 per cent.

  1.           Analyse the financial viability of the two options.  Which option would you recommend?  Why?


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