Question
CBD has recently decided to build a new processing plant. Process Engineering can provide this plant for a price of $2.4 Million. The new equipment
CBD has recently decided to build a new processing plant. Process Engineering can provide this plant for a price of $2.4 Million. The new equipment should increase efficiency in their processing process generating savings of $500,000 per year. If purchased, the plant will be depreciated straight line over the 8 year life. The interest rate for Cannsouth to get a loan for the plant is 6.5%
Agri-lease Ltd has offered Cannasouth a lease on this equipment for 8 years with annual (start of year) lease payments of $350,000. Agri-lease Ltd has a borrowing rate of 3.5%
Cannasouth enjoys a very low tax rate of 20% as they have yet to generate any operating income and Agri-Lease Ltd has a tax rate of 38%. The WACC for Cannasouth is 9.0%
What is the minimum lease payment that Agri-Lease Ltd could offer without diminishing value to its shareholders?
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