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Question - Smith Company will acquire a long-term asset for its production plant. Their accountant has suggested that they consider both the cost of leasing and the cost of ownership. The company's corporate income tax rate is 25%. Here are the details to be considered:
The Ownership (Purchase and Financing) alternative:
-Cost of the asset is $750,000
-Capital cost allowance is 30%.
-Life of the asset is 10 years. Residual value of the asset is nil ($0.00).
-Yearly loan payment is $106,783 (i.e. equal amount of payment will be made at the end of each year to repay the loan). Interest rate is 7%.
The Lease alternative:
-Annual cost of the lease (before tax) is $80,000.
-Duration of the lease is 10 years.
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