Question 2

NHA Builders Inc, a US construction firm is debating whether to buy or lease a crane which is costing US$7.2 million from Tower Heights Limited. The useful life of the crane is 15 years, at which time the salvage value is put at US$200,000.The depreciation (CCA) rate for tax purposes is 30%, and the prevailing corporate tax rate is 40%.Further, the cost of borrowing to NHA Builders Inc. is 5%.

Tower Heights Limited is willing to lease the crane for the entire fifteen years, accepting an annual lease payment of US$900,000 per annum, paid at the end of each year.

Required:

(i) Using appropriate computation, should NHA Builders Inc. buy or lease the crane?

Formulas

PVCCA= [C*CCA*T)/(CCA x R)] x [ (1+0.5R)/(1+R) [(SV * CCA*T)/(CCA+R) x(1/(1+R)^t] Where C=Cost of fixed asset; CCA=depreciation rate for tax purposes, R= discount rate; T= tax rate; SV=Salvage value, and t= the year of disposal of asset/end of lease period.