Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Sprite Canada has decided to acquire a bottling machine for its existing plant.The cost of the machine is $450,000.In five years the machine is expected

Sprite Canada has decided to acquire a bottling machine for its existing plant.The cost of the machine is $450,000.In five years the machine is expected to have a salvage value of $150,000.Bank of Nova Scotia has agreed to advance funds for the entire purchase price at 8 percent per annum payable in equal instalments at the end of each year over the five years.

As an alternative, the machine could be leased over the five years from the manufacturer, Metalworks LTD., with an annual lease payments of $100,000 payable at the beginning of each year.

Sprite Canada's tax rate is 40 percent.Its cost of capital is 15 percent, and its tax shields are realized at the end of the year.Bottling machines have a CCA rate of 20 percent.If the machine is owned, annual maintenance costs will be $5,000.

Required:

Should Sprite Canada lease or buy its machine?Show all calculations.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Multinational Business Finance

Authors: David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett

14th edition

133879879, 978-0133879872

More Books

Students also viewed these Finance questions