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COL Inc. can either purchase an equipment for $650,000 or lease it from LEN Inc. by making 12 annual lease payments (paid at the beginning of the year) of $89,600. The equipment has CCA rate of 20% and will have salvage value of $56,000 at the end of year 12. Assume this asset is the only asset in the asset class for both companies. LEN's borrowing cost is 11% which is 1% lower than COL's. COL and LEN have tax rate of 15% and 40% respectively.
a) Calculate the NPV of leasing for COL.
b) Calculate the NPV of leasing for LEN.
c) Calculate the maximum and minimum annual lease payment acceptable to COL and LEN respectively.
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