Determine great west should purchase or lease

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Great West Charter has been asked to operate a float plane service for a mining company that is embarking on a 5-year exploration program in Yukon Territory. To fulfill the terms of the contract, Great West will have to acquire a new float plane to add to its existing fleet. Having evaluated the terms of the contract, Great West has determined that the arrangement will be profitable and is now deciding whether it should purchase the new float plane at a cost of $750,000 or lease it at an annual cost of $160,000 paid at the beginning of the year. If Great West leases the plane, then it will be responsible for all maintenance and repair costs. If purchased, then the float plane will belong to a CCA class with a 30% rate. Given the extremely cold conditions under which the plane will be operated, Great West estimates its useful life to be 5 years, after which it will have negligible salvage value. Great West's tax rate is 31%, its cost of capital is 15% and its after-tax cost of borrowing is 9%. Based on this information, determine whether Great West should purchase or lease the new float plane.

Reference no: EM132953776

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