Howson Printing Ltd. (HPL) is looking at modernizing its facilities. As part of that process,
HPL has decided to acquire new high-speed colour laser photocopiers. It has the option of buying the machines for $100,000 or leasing them for 5 years. HPL would be able to finance 100% of the purchase with a 5 year 8% loan. If purchased, HPL would also purchase a 5-year maintenance contract for $1,000 per year, payable at year-end. Annual lease payments, including maintenance, would cost $23,000. There is not expected to be any residual value at the end of the lease. HPL's tax rate is 28%, and the equipment falls into Class 8 with a 20% CCA rate.
a. Should HPL buy or lease the copiers?
b. If the copiers had a residual value of $20,000, what difference would that make to the leasing decision?
c. If the government changed the CCA rate for the machines to 50%, what would be the new NAL?
d. Should HPL lease if it can borrow at 6%?