Management of Baldwin Equipment is considering increasing the productivity of its plant Management heard from suppliers that a certain piece of equipment could entail an after tax cash flow savings of more than $35,000 a year if it was installed in Baldwin's plant However, Jim Henderson, the controller of the company, is unsure whether the company should buy or lease the equipment If the asset is leased for a 10 year period, it would cost the company $45,000 a year (before tax) The company's income tax rate is 50 If the company buys the asset, it would cost $300,000 and be financed entirely through debt for a 10 year period at a cost of 10 The asset's capital cost allowance is 25 On the basis of this information, Jim is now considering whether to purchase or lease the equipment Use this template to answer the questions (Please show calculations) On the basis of the information provided above, which method of financing would be the most economically attractive (ie lowest total annual payments) Justify your answer by running a Buy Lease analysis Would Jim's decision to lease or buy the asset remain the same if the capital cost allowance increased to 40 Run a 2 nd Buy Lease analysis to determine the most economically attractive option If Jim is able to negotiate a better interest rate on the loan down to 6 and assuming the CCA amount is still the original 25 ), which method of financing would now be considered the most economically attractive (or does it remain the same) Run a 3 rd Buy Lease analysis to determine your answer (remember to change the PVIFA factor using the new interest rate and reset the CCA to 25 ) Lease Info Annual Payment Term Loan Info Loan Amount Annal Lease Cost Payment $0 0 Tax Savings After Tax Cost $0 $0 $0 $ $0 CCA or Straight Line Values Year 0 0 0 CCA or Value year Straight Line end 1 2 $0 $0 3 Interest Rate Term (years) PVIFA Factor Annual Payment Asset Info Value Cost Residual Tax Rate CCA 4 5 $0 $0 0 0 6 7 8 9 10 Lease Payment (after Year tax) Beginning Principal Loan Payment Finance Cost Principal Payment Tax CCA dedcutible Depreciation Expenses Tax Shield Net Cost of Owning 1 2 3 4 5 6 7 8 9 10 Totals

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Posted on Aug 05, 2024

Management of Baldwin Equipment is considering increasing the productivity of its plant. Management heard from suppliers that a certain piece of equipment could entail an

Management of Baldwin Equipment is considering increasing the productivity of its plant. Management heard from suppliers that a certain piece of equipment could entail an after-tax cash flow savings of more than $35,000 a year if it was installed in Baldwin's plant.

However, Jim Henderson, the controller of the company, is unsure whether the company should buy or lease the equipment. If the asset is leased for a 10 year period, it would cost the company $45,000 a year (before tax).

The company's income tax rate is 50%. If the company buys the asset, it would cost $300,000 and be financed entirely through debt for a 10 year period at a cost of 10%. The asset's capital cost allowance is 25%. On the basis of this information, Jim is now considering whether to purchase or lease the equipment.

Use this template to answer the questions: (Please show calculations) :

On the basis of the information provided above, which method of financing would be the most economically attractive (ie: lowest total annual payments)? Justify your answer by running a Buy-Lease analysis.
Would Jim's decision to lease or buy the asset remain the same if the capital cost allowance increased to 40%? Run a 2^nd Buy-Lease analysis to determine the most economically attractive option.
If Jim is able to negotiate a better interest rate on the loan down to 6% and assuming the CCA amount is still the original 25%), which method of financing would now be considered the most economically attractive (or does it remain the same)? Run a 3^rd Buy-Lease analysis to determine your answer (remember to change the PVIFA factor using the new interest rate and reset the CCA to 25%).

Lease Info: Annual Payment Term Loan Info: Loan Amount Annal Lease Cost: Payment $0 0 Tax Savings After Tax Cost $0 $0 $0 $ $0 CCA or Straight Line Values: Year 0% 0% 0 CCA or Value @ year Straight Line end 1 2 $0 $0 3 Interest Rate Term (years) PVIFA Factor Annual Payment Asset Info: Value/Cost Residual Tax Rate CCA 4 5 $0 $0 0% 0% 6 7 8 9 10 Lease Payment (after Year tax) Beginning Principal Loan Payment Finance Cost Principal Payment Tax CCA/ dedcutible Depreciation Expenses Tax Shield Net Cost of Owning 1 2 3 4 5 6 7 8 9 10 Totals