Traynor Industries is considering either leasing or buying some new equipment. The lessor will charge $9,950 a year as the annual lease payment. The purchase price is $27,900. The equipment belongs in a 30 percent CCA class and has a 3-year life after which time it will be worthless. Traynor borrows money at 7.25 percent, and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next five years. What is the net advantage to leasing?

Question

Quizplus · Accepted Answer

The net advantage to leasing (NAL) calculation involves comparing the cost of leasing to the cost of buying. Since Traynor Industries has tax loss carryovers, it can fully utilize the tax shield provided by the depreciation of the equipment. The cost of leasing is straightforward, $9,950 per year for 3 years. The cost of buying involves the initial purchase price, the tax shield from depreciation, and the cost of financing.The depreciation is calculated using the Capital Cost Allowance (CCA) rate of 30% on a declining balance. However, without the specific depreciation calculations and the cost of borrowing explicitly calculated here, we focus on the principle that the NAL calculation aims to find the difference in present value of leasing versus buying. The correct answer suggests that leasing offers a slight financial advantage of $22 over buying, considering the tax implications, depreciation, and financing costs. This advantage means that after accounting for all factors, leasing is marginally cheaper than buying by $22.

Traynor Industries Is Considering Either Leasing or Buying Some New