Use the table for the question(s)below.
Danby Construction is considering leasing a new crane for the next 5 years.Danby has created the following table of cash flows to help with the decision:

-Danby Construction has decided to lease a new crane for the next 5 years.The purchase price of the crane is $545,000,and the working life of the crane is 10 years.The crane falls under asset class 43 and has a capital cost allowance (CCA)rate of 30%.Assume disposal for $0 at the beginning of year 6.If leased,the annual lease payments will be $80,000 per year for five years,and it is a true tax lease.Assume the tax savings occur at the end of each year.If Danby's borrowing cost is 9%,and its tax rate is 30%,what is the amount of the lease-equivalent loan for the crane?
A)$308,968
B)$175,382
C)-$363,441
D)$156,032
E)$289,618

Question

Use the table for the question(s)below.
Danby Construction is considering leasing a new crane for the next 5 years.Danby has created the following table of cash flows to help with the decision:
 
-Danby Construction has decided to lease a new crane for the next 5 years.The purchase price of the crane is $545,000,and the working life of the crane is 10 years.The crane falls under asset class 43 and has a capital cost allowance (CCA)rate of 30%.Assume disposal for $0 at the beginning of year 6.If leased,the annual lease payments will be $80,000 per year for five years,and it is a true tax lease.Assume the tax savings occur at the end of each year.If Danby's borrowing cost is 9%,and its tax rate is 30%,what is the amount of the lease-equivalent loan for the crane?
A)$308,968 
B)$175,382 
C)-$363,441 
D)$156,032 
E)$289,618

Quizplus · Accepted Answer

The lease-equivalent loan amount can be calculated by finding the present value of the lease payments, taking into account the tax savings from the lease payments. The annual lease payment is $80,000, and with a tax rate of 30%, the after-tax cost of each lease payment is $80,000 * (1 - 0.30) = $56,000. The present value of these payments, discounted at the borrowing cost of 9% over 5 years, gives the lease-equivalent loan amount. Using the formula for the present value of an annuity: PV = PMT * [(1 - (1 + r)^-n) / r], where PMT = $56,000, r = 0.09, and n = 5, we find the present value, which closely matches option A, $308,968. This calculation assumes the simplification of tax effects and discounting at the borrowing rate.

Use the Table for the Question(s)below