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LEASE VS. BORROW TO PURCHASE (9 MARKS) Luigi's pizza emporium is considering whether to lease or purchase a new state of the art wood
LEASE VS. BORROW TO PURCHASE (9 MARKS) Luigi's pizza emporium is considering whether to lease or purchase a new state of the art wood fired pizza oven from Italy. The cost of the pizza oven will be $275,000 and has a useful life of 15 years. Luigi expects to retire in 10 years at which time he believes he can sell the oven for $50,000. Luigi has contacted a local financial institution and they have agreed to lend Luigi the funds to purchase at a rate of 9% with annual payments amortized over eight years. Alternatively, Luigi could lease the equipment from the manufacturer with lease payments of $40,000 per year for 8 years. The first payment will be due immediately upon delivery of the equipment. If the equipment is purchased the vendor will perform an annual maintenance on the oven at a cost of $3,000 per year. Luigi's Pizza has a cost of capital of 12% and a tax rate of 30%. Pizza ovens have a CCA rate of 25% Required: Should Luigi's pizza lease or borrow to purchase the equipment? Show all calculations.
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