SynSerge Limited has decided to acquire a machine, which will replace an existing piece of equipment. The company has the choice between leasing the new machine or purchasing it. The existing machine is currently worth $30 000, while the new machine would cost $405 850. With the new machine installed, SynSerge would reduce its costs by $86 500 a year. The new machine would have a useful life of 10 years, qualify for a 10% Investment Tax Credit (ITC) and have a salvage value after ten years of $45 000. This type of machine qualifies for a 30% CCA rate. For a 10-year lease the annual payment is expected to be $42 000 with the first payment due upon signing the lease contract. SynSerge's cost of capital is 10%, tax rate is 30% and the cost of raising long-term debt is estimated at 12%. What is the Net Present Value of the lease? Round your final answer tothe nearest dollar.
A) $55 817
B) $65 352
C) $47 227
D) $63 109

Question

Quizplus · Accepted Answer

The Net Present Value of the lease is $55,817. This is calculated by taking the present value of the lease payments and subtracting the present value of the salvage value. The present value of the lease payments is calculated by multiplying the annual payment by the present value factor for an annuity due. The present value of the salvage value is calculated by multiplying the salvage value by the present value factor for a single sum.

SynSerge Limited Has Decided to Acquire a Machine, Which Will