Question

In: Finance

Sanders Limited is considering whether to lease its equipment as an alternative to borrowing to purchase...

Sanders Limited is considering whether to lease its equipment as an alternative to borrowing to purchase it. The equipment will cost $230,000. This amount can be borrowed from a local bank at 8.5% interest with annual payments amortized over 6 years. Payments would be at the end of the year. The CCA rate on this equipment would be 25%, and the expected salvage at the end of 6 years is $33,000. Alternatively, lease payments of $47,000 could be made each year for 6 years, with the first payment due immediately. Sanders’ cost of capital is 13%, and its tax rate is 32%.

Required: What is the total cost of the Financing Option?

What is the total cost of the Leasing Option?

What is the difference in cost between the Financing Option and Leasing Option (from the perspective of the LEASING option)?

Which option should the company proceed with?

a. Financing Option

b. Leasing Option

Solutions

Expert Solution

cost of leasing;-

formulas used:-

present value (bank)=NPV(13%,F21:F26)

present value (lease)=PV(C8,C7,C6,,1)

hence the leasing is the bnnetter option than the bank loan.

i hope my efforts will be fruitful to you.

jeff jeffy answered 1 year ago
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