Question
The Clumsy Carpenter Company is considering whether to lease its equipment as an alternative to borrowing to purchase it. The equipment will cost $200,000. This
The Clumsy Carpenter Company is considering whether to lease its equipment as an alternative to borrowing to purchase it. The equipment will cost $200,000. This amount can be borrowed from a local bank at 8% interest with annual payments amortized over 6 years. Payments would be at the end of the year. and the expected salvage at the end of 6 years is $30,000.
Alternatively, lease payments of $42,000 could be made each year for 6 years, with the first payment due immediately.
If the equipment is purchased there will be an annual maintenance cost of $5,000 to ensure the equipment is running at optimal levels.
Clumsy Carpenter's cost of capital is 10%, and its tax rate is 33%.
The CCA rate on this equipment would be 25%,
Required:
Should the Clumsy Carpenter's lease or borrow to purchase? Show calculations to support your work.
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