Q1:

Vincent, the owner of Vincent Printing Ltd., has come to you, his financial analyst, for your recommendation. The company needs a new printing machine. The machine can be purchased today for $1,400,000. If the machine is purchased, the company would incur annual maintenance and insurance costs of $35,000, paid at the end of the year. The machine would qualify for the 30% CCA rate and for the Accelerated Investment Incentive allowing 1.5 times the CCA to be claimed in the year of acquisition. The company can borrow funds from the bank at an interest rate of 7%. The machine has a useful life of eight years, with a salvage value of $175,000 at the end of that time. Assume that there will be assets remaining in the class and a positive UCC balance after the proceeds on salvage are deducted. Alternatively, the machine can be leased for eight years. The lease requires annual payments of $230,000, made at the beginning of each year. The lessor will pay for any maintenance and insurance. The companys income tax rate is 23%. What is the net economic advantage (i.e. savings) from leasing this new machine?

1. 2Question 2.
2. Which of the following statements about a firms weighted average cost of capital (WACC) is true?
   1. The firms WACC will never be affected by how the firm raises additional capital to finance future capital investments.
   2. The firms WACC represents an opportunity cost for investors, so it must be calculated using current market values.
   3. The only reason for calculating a firms WACC is to determine the opportunity cost to investors so that they can decide whether to invest with the firm.
   4. An increase in the proportion of debt in the capital structure will always lead to an increase in the firms WACC because of the increased financial risk.