Omni Enterprises is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If it purchases the asset, the cost will be $$20,000.$ It can borrow funds for four years at $12$ percent interest. The asset will qualify for a $25$ percent CCA. Assume a tax rate of $35$ percent.

The other alternative is to sign two operating leases, one with payments of $$5,800$ for the first two years and the other with payments of $$7,500$ for the last two years. The leases would be treated as operating leases.

a$.$ Compute the aftertax cost of the lease for the four years. $($Negative answers should be indicated by a minus sign. Round the final answers to nearest whole dollar.$)$

Year Aftertax

cost

$0$ $

$1$

$2$

$3$

$4$

b$.$ Compute the annual payment for the loan. Use Appendix D$.($Round the final answer to nearest whole dollar.$)$

Annual payment $

c$.$ Compute the amortization schedule for the loan. $($Do not round intermediate calculations. Round the final answers to the nearest whole dollar.$)$

Year Beginning

Balance Annual

Payments Annual

Interest Repayment on

Principal Ending

Balance

$1$ $

$

$

$

$

$2$

$3$

$4$

d$.$ Compute the present value of the capital cost allowance. $($Do not round intermediate calculations. Round the final answers to the nearest whole dollar.$)$

PV$($CCA$)$ $

e$.$ Compute the aftertax cost of the borrow$-$purchase alternative. $($Do not round intermediate calculations. Round the final answers to the nearest whole dollar.$)$

Year Aftertax cost of borrow$/$purchase

$1$ $

$2$

$3$

$4$

f$.$ Compute the present value of the aftertax cost of the two alternatives. $($Round intermediate calculations and round the final answers to the nearest whole dollar.$)$

Present value

Leasing $

Borrow$/$Purchase $

g$.$ If the objective is to minimize the present value of aftertax costs, which alternative should be selected?

multiple choice

Leasing

Borrow$/$Purchase