Sanders Limited is considering whether to lease its equipment as an alternative to borrowing to purchase it. The equipment will cost $230,000. This amount can be borrowed from a local bank at 8.5% interest with annual payments amortized over 6 years. Payments would be at the end of the year. The CCA rate on this equipment would be 25%, and the expected salvage at the end of 6 years is $33,000. Alternatively, lease payments of $47,000 could be made each year for 6 years, with the first payment due immediately. Sanders cost of capital is 13%, and its tax rate is 32%.

Required: What is the total cost of the Financing Option?

What is the total cost of the Leasing Option?

What is the difference in cost between the Financing Option and Leasing Option (from the perspective of the LEASING option)?

Which option should the company proceed with?

a. Financing Option

b. Leasing Option