Encore Mobile wants to lease production equipment from ABC Co. The payments are $200,000 per year for 5 years payable at the beginning of each year. Encore wont have to worry about annual maintenance costs if the equipment is leased; ABC Co. has agreed to service the equipment at no additional charge. As an alternative, the bank offered to lend Encore Mobile a loan of $950,000 to purchase the equipment. The loan would be paid in equal instalments at the end of each year for 5 years at an annual interest rate of 11%. At the end of 5 years, the equipment could be sold for an estimated $250,000. However, Encore Mobile would have to pay for annual maintenance fee of the machine estimated at $14,000 per year. Encore Mobiles cost of capital is 13% and the tax rate is 40%. The equipment belongs to a CCA class with a rate of 25%.

1. PV of Leasing Payments:

a. ($883,605)

b. ($874,640)

c. ($479,000)

d. ($630,000)

2. PV of Leasing Tax Savings is:

a. $339,559

b. $331,559

c. $250,000

d. $350,267

3. PV Maintenance cost is:

a. ($35,621)

b. ($42,345)

c. ($34,814)

d. $32,719

4. PV Salvage Value is:

a. $135,690

b. $312,675

c. $332,670

d. $435,786

5. PVCCA is:

a. $354,789

b. $421,590

c. $778,532

d. $249,751