PART 4: LEASE VS. BORROW TO PURCHASE (8 MARKS)

Sanders Limited is considering whether to lease its equipment as an alternative to borrowing to purchase it. The equipment will cost $180,000. This amount can be borrowed from a local bank at 6% interest with annual payments amortized over 4 years. Payments would be at the end of the year. The CCA rate on this equipment would be 30%, and the expected salvage at the end of 4 years is $25,000.

Alternatively, lease payments of $55,000 could be made each year for 4 years, with the first payment due immediately.

Sanders cost of capital is 11%, and its tax rate is 30%.

Required:

Should Sanders lease or borrow to purchase? Show calculations to support your work.