Question
Big Beta Securities Inc. has decided to acquire a new market data and quotation system for its Vancouver home office. The equipment costs $1,000,000, and,
Big Beta Securities Inc. has decided to acquire a new market data and quotation system for its Vancouver home office. The equipment costs $1,000,000, and, if it were purchased, Big Beta could obtain a bank loan for the full purchase price at a 10% interest rate. The equipment falls into Class 45 with a CCA rate of 45%. If the system were purchased, a 4-year maintenance contract could be obtained at a cost of $20,000 per year, payable at the beginning of each year. The equipment would be sold after 4 years, and the best estimate of its residual value at that time is $200,000. However, since real-time display system technology is changing rapidly, the actual residual value is uncertain. As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Big Beta that Consolidated Leasing would be willing to write a 4-year lease on the equipment, including maintenance, for payments of $260,000 at the beginning of each year. Big Beta's tax rate is 35%.
Should Big Beta buy or lease the equipment? Explain
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