Question
Jamestown Industries is contemplating the acquisition of some new equipment. The purchase price is $40,000. The equipment has a 4-year life after which time it
Jamestown Industries is contemplating the acquisition of some new equipment. The purchase price is $40,000. The equipment has a 4-year life after which time it will be worthless. Furthermore, lease qualifies as tax lease. The equipment belongs in a 35 percent CCA class. The equipment can be leased for $11,000 a year. Payments are made at the beginning of the year. Furthermore, there is an increase in maintenance cost of $15,000, no matter whether the firm decide to buy or lease the new equipment. The firm can borrow money at 7 percent and has a 35 percent tax rate.
a) Please calculate net advantage to leasing for Jamestown Industries
b) The lessor also gives Jamestown Industries an option that ownership of the equipment will be automatically transferred to the lessee by the end of the term of the lease. If Jamestown Industries wants the leasing to have minimal impact on its financial statement, will the company accept the option? Please explain your answer. (3 marks) Please show the calculation process.
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