1.Saskatoon Oil Drilling (SOD) needs new equipment. The equipment can be purchased at a cost of $6 million. The equipment qualifies for a 30% CCA rate. SOD has a tax rate of 20% and it can borrow at 6.0%. As an alternative to buying, SOD can lease the equipment from Reliable Leasing Associates (RLA). The lease payments will be $1.4 per year to be paid at the beginning of the year. SOD will use the equipment for only 4 years starting with the purchase or lease date.

1. Assume that the tax breaks from the CCA are realized at the end of the year and that the undepreciated capital costs (UCC) remaining after Year 4 are realized as losses at the end of Year 5 (the asset class is discontinued at the end of year 5). Calculate the tax breaks that will be lost due to leasing. (6 marks) Hint: Use the following table to answer this question, add or delete rows or columns if desired.

use table such as :

End ofYear - 1,2,3,4,5

UCC

Adjustment for year rule

UCC for calculating CCA

CCA (at 30%)

Terminal loss

Tax break on CCA or terminal loss

2 Assume that the lease payments are paid at the beginning of the year but the tax breaks from the lease payments are realized at the end of the year in which they are paid. You want to calculate the Net Advantage to Leasing (NAL) for SOD. What are the incremental cash flows for this calculation? (6 marks) Hint: Use the following table to answer the question, add or delete rows or columns if desired.

that is the Incremental cash flows for NAL calculations

3 This is a continuation of Part (b). What is the NAL for SOD?

4.Assume that the asset class will not be discontinued at the end of Year 5 and that the UCC will continue for a long time. Also assume that the tax breaks from the lease payments are realized at the end of the year in which they are paid. What are the incremental cash flows for this scenario? (5 marks) Hint: The incremental cash flows for this scenario exclude the loss of tax breaks on the CCA and the terminal loss as the present value of the tax breaks will be calculated separately

5 Assume the same scenario as in Part (d). What is the NAL for SOD under this scenario?