Reference no: EM132485124

Problem: The Great Big Sea Fishing Company has decided to acquire a new fishing trawler in anticipation of a revival of the cod fishery. The president of the company, John Crosby, is undecided as to whether or not the company should purchase or lease the new trawler and has asked you for some assistance. You have been able to gather the following data.

A new trawler will cost $450,000 to purchase and will qualify for a special Investment Tax Credit of 4% which been established to assist the Newfoundland fishing industry. The trawler is classified as a class 7 asset (CCA 15%). The company expects to use the trawler for 6 years after which it will be sold. Due to the extreme uncertainty in the Newfoundland fishery, you can find no reliable estimate of salvage so you have estimated the salvage to be $150,000. The bank will extend financing for the purchase at 10% interest.

Alternatively, the trawler can be leased from the Grand Banks Leasing Company for the sum of $81,000 per year payable in advance. The salesman also advises that they can arrange a separate maintenance and storage contract that includes bottom washing, bottom painting, winterizing and winter storage for $5,000 per year. The leasing companies cost of capital is 11%.

The Controller, Carol Smith has advised you that the companies tax rate is 30% and that the cost of capital is 3% greater than the bank rate (ie 13%).

REQUIRED:

Calculate the Net Present Value of Leasing and advise the President whether the new trawler should be leased or purchased.