Question
Banfill Limited is interested in a piece of equipment, which costs $300,000 and has a five-year useful life. T he firms marginal tax rate is
Banfill Limited is interested in a piece of equipment, which costs $300,000 and has a five-year useful life. The firms marginal tax rate is 40% and the cost of capital is 16%. The equipment is in a class with a CCA rate of 30%; the lease rate is $90,000 at the beginning of each year for five years and the before-tax cost of borrowing is 12%. If the equipment is purchased, Banfill will have annual maintenance costs of $8,000. Under the lease agreement, the lessee will pay the regular maintenance costs. The expected salvage value at the end of 5 years is $50,000. Based on NPV analysis, the firm has determined that the project should be accepted. Should the equipment should be leased or purchased?
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