Question One:

Rain Airlines Limited is contemplating leasing an aircraft costing $90 million. The aircraft has a useful life of 10 years and is depreciated using the straight-line method over its useful life, with no scrap value at the end. Further, annual lease payment is $12 million per annum, paid at the end of each year for the next 15 years. Rain Airlines Limited can borrow at an interest rate of 10% before tax; while it enjoys a tax rate of 40%.

(i) Using appropriate computation, what is the Net Advantage of Leasing to Rain Airlines Limited should they buy or lease the aircraft.

(ii) Should Rain Airlines Limited buy or lease the asset if the tax rate is reduced to 20%

Question Two

XR Builders Inc, a construction company is debating whether to buy or lease a crane which is costing $7.2 million from Cranery Limited. The useful life of the crane is 15 years, at which time the salvage value is put at $200,000.The depreciation (CCA) rate for tax purposes is 30%, and the prevailing corporate tax rate is 40%. The cost of borrowing to XR Builders Inc is 5%. Cranery Limited is willing to lease the crane for the entire fifteen years, accepting an annual lease payment of $900,000 per annum, paid at the end of each year.

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