Question

Banana Inc. is considering either purchasing or leasing a $600,000 piece of specialized equipment. The equipment has a life of 5 years, belongs in a 30% CCA class, and will have no residual value. The cost of debt is is 12% for this purchase. A lease on this equipment for 5 years is priced at $150,000 a year. Banana Inc.'s corporate tax rate is 34%. What is Banana Inc.'s break-even lease payment?

a) $182,968

b) 170,802

c) $109,057

d) $133,677

e) $155,980

Answer 1

Year	CCA(UCC*30%)	UCC=Carrying value	DTS=CCA*34%	PV F at 7.92%	PV of DTS at 7.92%
0	90000	510000	30600	1	30600	###
1	153000	357000	52020	0.92661	48202.37
2	107100	249900	36414	0.85861	31265.44
3	74970	174930	25489.8	0.79560	20279.66
4	52479	122451	17842.86	0.73721	13153.97
5	36735.3	85715.7	12490	0.68311	8532.04
			Total PV of DTS=	152033.47
### Yr. of purchase depn. (CCA) 30%/2*600000=90000

After-tax cost of debt=12%*(1-34%)=7.92%

So, PV of purchase at 7.92%=

-600000+152033=

-447967

The annual after-tax break-even lease payment

must equal the PV of purchase

supposing it as "x"

x*(1-34%)*4.00114=447967      P/A,i=7.92%; n=5

x=447967/((1-34%)*4.00114)=

169636

Banana Inc.'s break-even lease payment = $ 169636

None of the answers are correct

the nearest answer being,

b) 170,802