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Banana Inc. is considering either purchasing or leasing a $600,000 piece of specialized equipment. The equipment...

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

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Expert Solution

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

ekkarill92 answered 2 years ago
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