Exotic Mango Farms Ltd. is considering whether to borrow funds and purchase a mango picking machine or lease the asset under an operating lease arrangement. The lease would be from the local leasing store with annual lease payments, payable at the beginning of each of the next 7 years (the time horizon for the analysis), of $8,500.

As an alternative, the owner approached his bank to enquire about a loan to purchase the printing machine. The cost of the machine is $54,000 and, at the end of 7 years, the market (salvage) value is estimated to be $15,000. The bank has informed him that they would charge 9 percent per year (payable annually, at the end of each year).

The equipment has a CCA rate of 25 percent. The benefits of any tax shields are realized at the end of each year. The companys tax rate is 30 percent. Bowden Printings cost of capital is 15 percent.

Required:

a. Record your answers and use the space below to support those answers:

Discount Rate Used (use two decimals xx.xx)								%
Leasing Option
Present Value of Leasing Option (enter as a negative number)
Borrow to Purchase Option
Cost of Machine								$ -54,000
Present Value of Salvage (enter as a positive number)
Present Value of CCA Tax Shield (enter as a positive number)
Present Value of Borrow to Purchase Option (enter as a negative number)

b. Should Bowden Printing lease or borrow to purchase the machine?

multiple choice

• Lease

• Borrow to Purchase