Reference no: EM133161197

Question - Cherry Pickings Farms Inc. is considering whether to borrow funds to purchase a machine for cherry picking 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 seven years of $8,500. (Seven years is the time horizon for the analysis.) As an alternative, the owner has approached his bank to enquire about a loan to purchase the cherry picking machine. The cost of the machine is $54,000 and, at the end of seven years, the market (salvage) value is estimated to be $15,000. The bank has informed him that they would charge 9 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. Cherry Pickings Farms Inc.'s cost of capital is 15 percent.

Required - Gather the key facts and compute the followings:

A. Present value of borrow-to-purchase?

B. Present value of the lease alternative?

C. Which alternative would you choose?

D. Why would you choose that alternative?