Question

calculate whether it would be nore economical to kease or buy a car: cost of the car ($35,000), term of the lease (5 years@ $7,000), tax shield(40%), CCA allowance (5 year straight line), residual value (nil), finance costs (8%).

Answer 1

Option 1 : Buy a car
Tax savings on depreciation
Year	1	2	3	4	5
Depreciation	7000	7000	7000	7000	7000
Tax shield @ 40%	2800	2800	2800	2800	2800
PV factor @8%	0.926	0.857	0.794	0.735	0.681
PV of tax saving on dep	2593	2401	2223	2058	1906
Total PV of tax saving	11180
Option 1 : Leasing
Tax savings on payment of lease rental
Year	1	2	3	4	5
Lease rent per year	7000	7000	7000	7000	7000
Tax shield @ 40%	2800	2800	2800	2800	2800
PV factor @8%	0.926	0.857	0.794	0.735	0.681
PV of tax saving on LR	2593	2401	2223	2058	1906
Total PV of tax saving	11180
Conclusion
Both the options are equally economical as the PV of tax saving under both the options is same
Note:
It is assumed that the tax shield under both the options is same
It is assumed that the under first option the car is purchased with own money with out any borrowing as the repayment schedule is not provided in the given question