Question
LEASE VS. BORROW TO PURCHASE (9 MARKS) The Aromatic Bean Company is considering whether to lease its equipment as an alternative to borrowing to purchase
LEASE VS. BORROW TO PURCHASE (9 MARKS)
The Aromatic Bean Company is considering whether to lease its equipment as an alternative to borrowing to purchase it. The equipment will cost $175,000. This amount can be borrowed from a local bank at 9% interest with annual payments amortized over 5 years. Payments would be at the end of the year. and the expected salvage at the end of 5 years is $60,000.
Alternatively, lease payments of $65,000 could be made each year for 5 years, with the first payment due immediately.
If the equipment is purchased there will be an annual maintenance cost of $12,000 to ensure the equipment is running at optimal levels.
Aromatic's cost of capital is 14%, and its tax rate is 27%.
The CCA rate on this equipment would be 25%,
Required:
Should the Aromatic Bean Company lease or borrow to purchase? Show calculations to support your work.
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