It is time for the renewal of existing photocopying equipment at Runt Ltd.New equipment will cost $95,000 and this amount can be borrowed from the local bank at 7 percent interest with annual payments at the end of the year.The CCA rate on the equipment would be 20 percent.The equipment will be salvaged in 5 years for $24,000.The current equipment is worth $12,500.Runt could also lease the equipment with annual lease payments of $20,000 payable at the beginning of each year,which would avoid the annual maintenance expense of $1,250 involved if they purchase the equipment.Cost of capital is 14 percent.The tax rate is 40 percent.
Should Runt Ltd.lease or borrow to purchase the photocopying equipment?

Question

Quizplus · Accepted Answer

The Answer of It is time for the renewal of existing photocopying equipment at Runt Ltd.New equipment will cost $95,000 and this amount can be borrowed from the local bank at 7 percent interest with annual payments at the end of the year.The CCA rate on the equipment would be 20 percent.The equipment will be salvaged in 5 years for $24,000.The current equipment is worth $12,500.Runt could also lease the equipment with annual lease payments of $20,000 payable at the beginning of each year,which would avoid the annual maintenance expense of $1,250 involved if they purchase the equipment.Cost of capital is 14 percent.The tax rate is 40 percent.
Should Runt Ltd.lease or borrow to purchase the photocopying equipment?

It Is Time for the Renewal of Existing Photocopying Equipment