Question
Greenwood Ltd., one of the largest commercial builders in the city, has decided to purchase a new piece of equipment due to a very strong
Greenwood Ltd., one of the largest commercial builders in the city, has decided to purchase a new piece of equipment due to a very strong order book.You have just been hired as their new financial analyst and have been asked if the company should buy the equipment or lease it. The leasing contract would include maintenance. You have been given the following information:
Purchase price $70,000
Leasing term 4 years
Lease payments $19,400
4-year term loan 7.5%
Maintenance cost $950/year
Residual value none
Tax rate 32%
PV of CCA tax shield $23,800
Show all work.
- Should the company lease or buy the equipment? (5 marks)
- If the equipment had a residual value, how would this impact the decision? (2 marks)
- Discuss two other factors that should be taken into consideration when deciding if the company should buy or lease. (3 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To determine if Greenwood Ltd should buy or lease the equipment we will calculate the net present value NPV for both options Whichever has a higher NP...Get Instant Access to Expert-Tailored Solutions
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Step: 2
Step: 3
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