Omni Enterprises is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If it purchases the asset, the cost will be $10,000. It can borrow funds for four years at 12 percent interest. The asset will qualify for a 25 percent CCA. Assume a tax rate of 35 percent.
The other alternative is to sign two operating leases, one with payments of $2 ,600 for the first two years and the other with payments of $4,600 for the last two years. In your analysis, round all values to the nearest dollar. The leases would be treated as operating leases.
a. Compute the aftertax cost of the lease for the four years.
b. Compute the annual payment for the loan.
c. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan. It is due to rounding.)
d. Determine the cash flow effect of the CCA.
e. Compute the aftertax cost of the borrow-purchase alternative.
f. Compute the present value of the aftertax cost of the two alternatives.
g. If the objective is to minimize the present value of aftertax costs, which alternative should be selected?