Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

C.T. All Ltd., a manufacturer of customized baseball souvenirs, is negotiating with the Grand Slam Company to purchase or to lease a machine that produces

C.T. All Ltd., a manufacturer of customized baseball souvenirs, is negotiating with the Grand Slam Company to purchase or to lease a machine that produces foam cushions for seating at baseball parks. The machine would cost $250,000. In five years the machine would have an estimated salvage value of $40,000. Its useful economic life is nine years. These machines have a CCA rate of 20 percent.

C.T. All can borrow funds at 13 1/3 percent from its Nearby Bank, and has a tax rate of 25 percent. The capital cost rate on this machine is 9 percent, and C.T. Alls cost of capital is 15 percent. Lease payments would be at the beginning of each year, and tax savings would occur at the end of each year. Lease payments would be $64,645.

We note that of all the cash flows, the salvage value has the greatest uncertainty. We recognize this by discounting the salvage value at a higher discount ratethe cost of capital.

a-1. Calculate PV cost of lease alternative. (Do not round the intermediate calculations. Round the final answer to nearest whole dollar. Input the answer as positive value.)

PV cost $

a-2. Calculate PV cost of borrowing/purchase alternative. (Do not round the intermediate calculations. Round the final answer to nearest whole dollar. Input the answer as positive value.)

PV cost $

b. Should C.T. All Ltd. lease or borrow to purchase the machine?

  • Lease

  • Borrow/Purchase

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Advanced Principles Of Auditing

Authors: Hugo Romero

1st Edition

1632409372, 978-1632409379

More Books

Students also viewed these Accounting questions