DogChew Products needs to replace its rawhide tanning and molding equipment. It can be used for five years and will have no salvage value. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 9%. The firm's tax rate is 39%. The CCA rate is 20% (Class 8).

Assume your company will not pay taxes for the next five years. Now what is the net advantage to leasing?
A) -$108,731
B) -$88,132
C) -$2,837
D) $138,706
E) $152,062

Question

DogChew Products needs to replace its rawhide tanning and molding equipment. It can be used for five years and will have no salvage value. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money to purchase the equipment at 9%. The firm's tax rate is 39%. The CCA rate is 20% (Class 8) .

Assume your company will not pay taxes for the next five years. Now what is the net advantage to leasing?

Assume your company will not pay taxes for the next five years. Now what is the net advantage to leasing?
A) -$108,731
B) -$88,132
C) -$2,837
D) $138,706
E) $152,062

Quizplus · Accepted Answer

The net advantage to leasing is -$108,731. This is because the present value of the lease payments is less than the present value of the purchase price of the equipment. The present value of the lease payments is $930,000 * (1 - (1 + 0.09)^-5) / 0.09 = $781,269. The present value of the purchase price of the equipment is $930,000 * (1 - (1 + 0.09)^-5) / 0.09 * (1 - 0.39) = $562,538. The net advantage to leasing is $781,269 - $562,538 = -$108,731.

DogChew Products Needs to Replace Its Rawhide Tanning and Molding