Lakemark Corporation has decided to acquire a machine, which will replace an existing piece ofequipment. The company has the choice between leasing the new machine or purchasing it. Theexisting machine is currently worth $8 000, while the new machine would cost $140 226. With the new machine installed, Lakemark would reduce its costs by $22 670 a year. The new machine would have a useful life of 8 years, qualify for a 10% Investment Tax Credit (ITC) and have a salvage value after 8 years of $10 000. This type of machine qualifies for a 20% CCA rate. For an8-year lease the annual payment is expected to be $23 500 with the first payment due upon signing the lease contract. Lakemark's cost of capital is 9%, tax rate is 30% and the cost of raising long-term debt is estimated at 10%. What is the Net Present Value of the lease? Round your final answer tothe nearest dollar.
A) -$6 885
B) $12 004
C) $5 959
D) -$11 961

Question

Quizplus · Accepted Answer

The Net Present Value (NPV) of the lease is calculated by considering the lease payments, tax savings from lease payments, and comparing it to the cost of purchasing the machine. After calculating the present value of lease payments and tax savings, the NPV of the lease option is -$11,961.

Lakemark Corporation Has Decided to Acquire a Machine, Which Will