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Imagine Victoria Industrial Equipment Corporation (VIEC) located in Canada has an asset costs $675,000 at the beginning of the year. The Capital Cost Allowance rate for this asset is 25%. The asset's useful life is 24 months after which it will be worth $50,000. The corporate tax rate on ordinary earning (income) is 35%. The interest rate on risk-free cash flows is 10% and the asset pool is kept open indefinitely.
Based on the information given above, calculate and answer the following three questions:
a. Assuming lease payments and CCAs are made at the end of the year, what set of lease payments will make the lessee and the lessor equally well off?
b. Illustrate and show the general condition that will make the value of a lease to the lessor the negative of the value to the lessee.
c. For what range of lease payments does the lease have a positive Net Present Value for both parties if you assume that the lessee pays no taxes and the lessor is in the 35% tax bracket. Will leasing occur?
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