Reference no: EM132611409

The Barrhaven-Bell's Corner (BBC) Railway would like to acquire 4 new locomotives to increase its passenger and freight capacity.  BBC has two decisions to make:

(i) should it undertake this new locomotive purchase project; and

(ii) if the project should be undertaken should BBC lease or buy/borrower.

BC is considering the following six-year locomotive project:

Purchase the 4 locomotives at a price of $1.5 million each.
Each locomotive will have salvage value of $250,00 after six years
The project will increase BBC's pretax cash flow by $4.0 million a year
Locomotives have a CCA rate of 15 percent.
BBC's WACC is 11% and its tax rate is 35%.

To finance the project BBC is considering the following two options:

Option 1 - Issue a six-year bond with a 9% coupon rate

Option 2 - Lease the Locomotives - The annual lease rate would be $245,000 each year for each of the locomotives), for a six-year contract. These lease payments would be made at the beginning of each year.

Using the NPV capital budgeting technique should BBC undertake this project?

Assume that the Present Value of the Capital Cost Allowance Tax Shield (PVCCATS) for purchasing the 4 locomotives is $1.025 million (Note: this assumption is not necessarily the answer any of the questions above).

Select one:

a. Yes, because the NPV of the project is $ 6,044 million

b. No, because the NPV of the project is NPV: -$7,304 million

c. Yes, because the NPV of the project is $6.559 million

d. Yes, because the NPV of the project is $5,534 million

e. None of the above