Que 2 Dan Fur Ltd. has decided to acquire a cooling machine. Its cost is $40000. The Bank has agreed to advance funds for the entire purchase price at 8 %p.a. in equal instalments at the end of eash year over 5 years. As an alternative, the machine could be leased over the 5 years from the manufacturer, with annual lease payments of $8000 payable at the beginning of each year. The lease would be treated as operating lease. Dan Fur's tax rate is 30%, and its tax shields are realized at the end of the year. CCA rate is 20% for the cooling machines. Calculate: a. PV of the borrow/purchase alternative b. PV of lease alternative C. Which alternative will be more favourable based on PV? Answer: a Cost of assets Loan 40,000 40,000 b N (year) Interest rate Tax rate CCA after-tax cost as the discount rate PV of CCA tax shield Cost of assets PV of CCA tax shield PV of borrow/buy alternative Lease alternative: Lease payment N- tax saving on lease payment PV of PMT (BGN) PV of tax saving on lease payment (end) PV of lease alternative 8% 30% 20% 8,000