Question

Dan Teasin’s Furs And Coats Ltd. has decided to acquire a cooling machine. Its cost is $50,000. In five years it can be salvaged for $15,000. The Cloister Bank has agreed to advance funds for the entire purchase price at 8 percent per annum payable in equal installments at the end of each year over the five years.

As an alternative, the machine could be leased over the five years from the manufacturer, Snowbird Ltd., with annual lease payments of $10,000 payable at the beginning of each year.

Dan Teasin’s tax rate is 20 percent. Its cost of capital is 15 percent, and its tax shields are realized at the end of the year. Cooling machines have a CCA rate of 20 percent. If the machine is owned, annual maintenance costs will be $500.

a-1. Calculate PV cost of lease alternative. (Do not round the intermediate calculations. Round the final answer to nearest whole dollar. Input the answer as positive value.)

PV cost           $

a-2. Calculate PV cost of borrowing/ purchase alternative. (Do not round the intermediate calculations. Round the final answer to nearest whole dollar. Input the answer as positive value.)

PV cost           $

b. Should Dan Teasin’s lease or buy its machine?

• Lease

• Borrow/Purchase

Answer 1

Dan Teasin's should opt for borrow and purchase decision as the net present value of cash outflow in case of borrow and purchase ($ 39464) is less than the net present cash outflow of leasing ($ 53939)

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