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The companys bank has offered to lend the purchase price at 9% per year, payable in equal blended payments at the end of each year,

The companys bank has offered to lend the purchase price at 9% per year, payable in equal blended payments at the end of each year, for 7 years.

The equipment has a CCA rate of 20%. The benefits of any tax shield are realized at the end of each year. Phoenixs tax rate is 30%, and their cost of capital is 12%. Should the company lease or buy the machine? Use a 7-year time-horizon for this analysis.

Your answer should include the following - Show all your calculations.

  1. (1 mark) What is the present value (PV) of the lease payments?
  2. (1 mark) What is the PV of the tax savings with the leasing option?
  3. (1 mark) What is the PV of annual loan payments and tax savings from the loan alternative?
  4. (1 mark) What is the PV of the salvage value?
  5. (2 marks) What is the PV of the capital cost allowance with the loan alternative?
  6. (1 mark) Should Phoenix Farms buy or lease the new machine?
  7. (3 marks) Discuss 2 primary reasons why some companies may prefer to lease new equipment rather than purchase it.

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