Reference no: EM132491795

Exotic Mango Farms Ltd. is considering whether to borrow funds and purchase a mango picking machine or lease the asset under an operating lease arrangement. The lease would be from the local leasing store with annual lease payments, payable at the beginning of each of the next 6 years (the time horizon for the analysis), of $9,000.

As an alternative, the owner approached his bank to enquire about a loan to purchase the printing machine. The cost of the machine is $53,000 and, at the end of 6 years, the market (salvage) value is estimated to be $15,000. The bank has informed him that they would charge 8 percent per year (payable annually, at the end of each year).

The equipment has a CCA rate of 25 percent. The benefits of any tax shields are realized at the end of each year. The company's tax rate is 30 percent. Bowden Printing's cost of capital is 14 percent.

Required:

a. Record your answers and use the space below to support those answers:

Enter the discount rate with two decimal places. (e.g. xx.xx%)
Round Present Values to zero decimal places.
Enter Present Values as negative numbers.

Discount Rate Used

Leasing Option

Present Value of Leasing Option

Borrow to Purchase Option

Cost of Machine $53,000

Present Value of Salvage

Present Value of CCA Tax Shield

Present Value of Borrow to Purchase Option

b. Should Bowden Printing lease or borrow to purchase the machine?