Problem 5 (37 marks) Ben's Brewery Limited recently completed a capital budgeting NPV analysis and has determined they need to expand to keep up with the growing demand for their product. They will require several new pieces of specialized equipment. Michael has been hired as a Co-op student for the summer and has been asked to do a NAL analysis to determine whether it would make more sense to lease or purchase the equipment. Michael has examined the proposed lease and has determined the following: (1) The equipment has a purchase price of $1,400,000 and has an eight-year useful life. (2) The estimated salvage value is $300,000 in eight years. (3) If Ben's Brewery acquires the equipment (accepts the project), they will generate after-tax cash flows of $155,000 per year. (4) If Ben's Brewery purchases the equipment, it will cost the firm $5,000 today in training costs and these training costs will be expensed for income tax purposes. Under the terms of the lease, the lessor will be responsible for training costs. (5) If they lease the equipment from JK Enterprises, the lease payments will be $225,000 per year for 8 years with the payments made at the beginning of the year. (6) If the asset is purchased, Ben's Brewery will be responsible for maintenance costs of $15,000 per year; if leased, the lessee will be responsible for maintenance costs. (7) The asset belongs in an asset class with a CCA rate of 35%. (8) If the asset is leased, the cost to insure the asset would be more expensive, requiring the lessee to pay an additional $$000 per year (to be paid at the beginning of the year). Problem 5 (37 marks) Ben's Brewery Limited recently completed a capital budgeting NPV analysis and has determined they need to expand to keep up with the growing demand for their product. They will require several new pieces of specialized equipment. Michael has been hired as a Co-op student for the summer and has been asked to do a NAL analysis to determine whether it would make more sense to lease or purchase the equipment. Michael has examined the proposed lease and has determined the following: (1) The equipment has a purchase price of $1,400,000 and has an eight-year useful life. (2) The estimated salvage value is $300,000 in eight years. (3) If Ben's Brewery acquires the equipment (accepts the project), they will generate after-tax cash flows of $155,000 per year. (4) If Ben's Brewery purchases the equipment, it will cost the firm $5,000 today in training costs and these training costs will be expensed for income tax purposes. Under the terms of the lease, the lessor will be responsible for training costs. (5) If they lease the equipment from JK Enterprises, the lease payments will be $225,000 per year for 8 years with the payments made at the beginning of the year. (6) If the asset is purchased, Ben's Brewery will be responsible for maintenance costs of $15,000 per year; if leased, the lessee will be responsible for maintenance costs. (7) The asset belongs in an asset class with a CCA rate of 35%. (8) If the asset is leased, the cost to insure the asset would be more expensive, requiring the lessee to pay an additional $$000 per year (to be paid at the beginning of the year)
