Question
Auto Mart Inc. is contemplating whether to lease or buy some new equipment. The equipment costs $740,000 if purchased and qualifies for a 30% CCA
Auto Mart Inc. is contemplating whether to lease or buy some new equipment. The equipment costs $740,000 if purchased and qualifies for a 30% CCA rate. The equipment will be operated for 4 years, and then it is expected to be sold for $5,000. The tax rate is 40% and the pre-tax cost of debt is 9%. Alternatively, Auto Mart could lease the equipment for $240,000 per year. The lease payments will be made at the beginning of each year.
5. What is the present value of the lease payments that your firm would have to make? A) $505,907 B) $508,506 C) $533,227 D) $843,180 E) $888,712
6. What is the present value of the CCA tax shield for this equipment? A) $218,292 B) $244,422 C) $217,202 D) $243,048 E) $288,113
7. Suppose that your answer to the previous question was that the present value of the CCA tax shield is $300,000 and all other details are as given in the original question data. What would the before-tax lease payment have to be for Auto Mart to be indifferent between leasing and buying the equipment? A) $124,087 B) $117,730 C) $206,812 D) $196,217 E) $205,755
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