Reference no: EM132994031
Question - Sedona Farms Ltd. needs a new lemon picking machine. The cost of the machine is $50,000, and it has an economic life of 10 years. At the end of seven years, the salvage value is estimated to be $12,000. Management is not sure if they should purchase the machine or lease it.
The manufacturer has offered to lease the machine at yearly payments of $7,500, with payments due at the beginning of each year. This would be considered an operating lease.
The company's bank has offered to lend the purchase price at 7% per year, payable in equal blended payments at the end of each year, for 7 years.
The equipment has a CCA rate of 20%. The benefits of any tax shield are realized at the end of each year. Sedona's tax rate is 30%, and their cost of capital is 9%. Should the company lease or buy the machine? Use a 7-year time-horizon for this analysis.
Your answer should include the following - Show all your calculations.
Required -
-What is the present value (PV) of the lease payments?
-What is the PV of the tax savings with the leasing option?
-What is the PV of annual loan payments and tax savings from the loan alternative?
-What is the PV of the salvage value?
-What is the PV of the capital cost allowance with the loan alternative?
-Should Phoenix Farms buy or lease the new machine?
-Discuss 2 primary reasons why some companies may prefer to lease new equipment rather than purchase it.
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