Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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.

  1. Should the company lease or buy the equipment? (5 marks)
  2. If the equipment had a residual value, how would this impact the decision? (2 marks)
  3. 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... 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

Entrepreneurship

Authors: Andrew Zacharakis, William D Bygrave

5th Edition

1119563097, 9781119563099

More Books

Students also viewed these Finance questions

Question

e. What are the three steps of corporate risk management?

Answered: 1 week ago