Question
Shelina Company is considering leasing a warehouse under a 10-year financial lease with lease payments of $150,000 at the end of each year. The warehouse
Shelina Company is considering leasing a warehouse under a 10-year financial lease with lease payments of $150,000 at the end of each year. The warehouse is valued at $2.2 million, of which $1.2 million is the land value and the remaining $1,000,000 is the value of the building. The building is eligible for CCA rate of 10% on the declining balance. At the end of the 10 years, the building will have no residual value, but the land will have appreciated at 3% per year over the 10-year lease period. An appropriate risk-adjusted discount rate for the residual land value would be 15%. The company can take a 10-year term loan at 10% annual interest rate and its tax rate is 40% and the capital gain, if any, will be taxed at half of this rate.
Should Shelina undertake lease financing? Show calculations to support your answer.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started