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New equipment can be leased for $20,000 per year for 7 yrs (payments due at the beginning of each year) or purchased for $120,000. The lease tax savings are at the end of each year. The useful life is seven years with a salvage value of $10,000. The new equipment will require servicing after three years, for a cost of $25,000, which is tax deductible and paid by the company regardless of whether the equipment is leased or purchased. The company's cost of debt is 5%, marginal tax rate is 40% and a CCA rate of 30%.
-Compute the NAL
-Calculate the indifference (breakeven) lease payment in (a).
-Assume the cost of service after three years is paid by the company only if the equipment is purchased (i.e. if the equipment is leased, the lessor will be responsible for the cost of the service). Should the company lease or buy the new piece of equipment?
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