Reference no: EM133633328
Case: Your company is considering a purchase of a new testing equipment for its R&D department. The equipment will cost $120,000. It will be obsolete in three years due to excessive use. To purchase the equipment, your company will borrow money at 10%. Alternatively, it can lease the equipment with lease payments of $45,000, payable at the beginning of each year. If your company buys the equipment this year, it can apply a CCA rate of 30% per year and get incentive for first year to use 1.5 times to depreciate. The applicable marginal tax rate is 40% per year. As there will be other assets in the R&D department, you can assume that the asset pool will remain open. Answer the following questions relating the analysis whether to lease or buy.
i) Is this an operating lease or a capital lease? Explain.
ii) What would be the appropriate rate to discounting any future cash flows for analysis of advantage on lease? Why?
iii) Calculate the net advantage to leasing (NAL) and state what your company should do?
iv) If your company leases the equipment how it should treat the lease in the balance sheet at initiation?
v) What is the indifferent lease payment (pre-tax) for your company?
vi) What is "Leasing Paradox"? How is it solved in the real world?
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