Question
In: Accounting
The senior management at Brady Food Company Ltd. (BFC) has decided to acquire new automated ordering...
The senior management at Brady Food Company Ltd. (BFC) has decided to acquire new automated ordering kiosks for its 10 restaurants. Senior management is trying to decide whether it should purchase the kiosks with borrowed funds or lease the kiosks for a seven-year period. Leasing costs would be $150,000 per year with payments made at the beginning of each year. Under the lease agreement, BFC would be responsible for yearly maintenance costs of $28,500. Insurance costs are included in the lease payments. If BFC purchases the kiosks, insurance costs for the system would total $56,000 per year. The purchase price of the automated ordering kiosks is $1,000,000. Delivery and setup costs will total $65,500. The kiosks are a Class 43 asset with a capital cost allowance (CCA) rate of 30%. If senior management decides to purchase the kiosks, the CCA class would remain open after the kiosks are sold. The expected useful life of the kiosks is seven years, and they are expected to have a salvage value of $125,000. BFC is subject to tax at a rate of 40%, its cost of capital is 14.25%, and it can finance the purchase with a seven-year term loan at an annual rate of 7.25%.
Required: Determine whether BFC should lease the kiosks or purchase the kiosks with borrowed funds.
Solutions
ekkarill92 answered 1 year agoRelated Solutions
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