You are the manager of a sales division, and are considering leasing a fleet of cars for your staff.You can buy the cars for $300,000 or you can lease them for 8 years at $60,000 per year with payments due at end of each year.The company has a tax rate of 40.0% and a CCA rate of 10.0% on vehicles.If the company buys the cars and finances the purchase with a loan, they will pay 7.0% in interest.Assume that after the term of the lease is over, the salvage value of the cars will be zero.What is the NPV of the lease, based on half-year rule for CCA in the first year?
A)$217,196
B)$59,610
C)-$23,194
D)-$240,390

Question

Quizplus · Accepted Answer

To calculate the NPV of the lease, we need to consider the cost of leasing versus buying, including tax savings from depreciation (CCA) and interest expenses. The half-year rule for CCA means that in the first year, only half of the CCA rate applies. However, without detailed calculations provided in the question, it's challenging to directly compute the NPV. The correct choice, based on the information given, involves understanding that leasing might avoid upfront costs and CCA calculations but incurs a steady expense, impacting NPV negatively when compared to potential benefits from buying, financing, and utilizing tax deductions over time. The negative NPV suggests that leasing is less advantageous financially compared to the alternative scenario, possibly due to the loss of tax benefits from depreciation and interest deductions over the lease term.

You Are the Manager of a Sales Division, and Are