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