The Barrhaven-Bells Corner (BBC) Railway would like to acquire 4 new locomotives to increase its passenger and freight capacity. BBC has two decisions to make:

(i) should it undertake this new locomotive purchase project; and

(ii) if the project should be undertaken should BBC lease or buy/borrower.

BBC is considering the following six-year locomotive project:

Purchase the 4 locomotives at a price of $1.5 million each.

Each locomotive will have salvage value of $250,00 after six years

The project will increase BBCs pretax cash flow by $4.0 million a year

Locomotives have a CCA rate of 15 percent.

BBCs WACC is 11% and its tax rate is 35%.

To finance the project BBC is considering the following two options:

Option 1 Issue a six-year bond with a 9% coupon rate

Option 2 Lease the Locomotives The annual lease rate would be $245,000 each year for each of the locomotives), for a six-year contract. These lease payments would be made at the beginning of each year.

What would be the Present Value of the Capital Cost Allowance Tax Shield (PVCCATS) due to purchasing the 4 locomotives?

Select one:

a. None of the above

b. $1.052 million

c. $1.044 million

d. $1.135 million

e. $0.923 million