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

Quizplus · Accepted Answer

The net advantage to leasing can be calculated as follows:

Lease cost per year for 5 years = $245,000 x 5 = $1,225,000 
Tax shield = ($930,000 x 0.2 x 0.39) + ($930,000 x 0.2 x 0.61 x 0.09) = $21,726 
Present value of tax shield = $21,726 x (1 - 1/1.09^5) / 0.09 = $76,616

Net advantage to leasing = $1,225,000 - $930,000 - $76,616 = -$108,731

Therefore, the best choice(s) is to borrow the money to purchase the equipment at 9%.

DogChew Products Needs to Replace Its Rawhide Tanning and Molding