Your ﬁrm needs to either buy or lease $230,000 worth of vehicles. These vehicles have a life of 4 years after which time they are worthless. The vehicles belong in CCA class 10 (a 30% class) and
Can be leased at a cost of $68,000 a year for the 4 years. The corporate tax rate is 34% and the
Cost of debt is 10%.
What is the net advantage to leasing?

Question

Quizplus · Accepted Answer

Buying:
- Initial investment: $230,000
- Capital cost allowance (CCA) for class 10: $69,000 (30% of $230,000)
- After-tax salvage value (at 34% tax rate): $0
- Net present value (NPV) of after-tax cash flows (at 10% cost of debt and 4-year life): -$183,823

Leasing:
- Annual lease cost: $68,000
- NPV of after-tax cash flows (at 10% cost of debt and 4-year life): -$179,462

Net advantage to leasing = NPV of buying - NPV of leasing = -$183,823 - (-$179,462) = -$4,361

Therefore, the net advantage to leasing is $4,361, so the best choice is to lease the vehicles.

Your ﬁRm Needs to Either Buy or Lease $230,000 Worth