Question 13

BBN Inc. is considering an equipment for its new factory. It can either purchase the equipment for $56,800 or lease it from QuickLease with 8 annual lease payments of $8.470 (payable at the beginning of each year). The equipment has CCA rate of 21% and salvage value of $8.120 at the end of year 8.

A. BBN has tax rate of 26% and cost of debt of 7.1%. The asset class remains open with positive UCC after the sale of the equipment. Calculate the NPV of leasing for BBN and the maximum annual lease payment it will pay.

B. QuickLease has tax rate of 31% and cost of debt of 4.2%. The equipment is the only asset in the asset class for QuickLease. Calculate the NPV of leasing for QuickLease and the minimum annual lease payment it will accept.