Your company needs to acquire a new heavy-duty truck, as shown in the picture below, to haul equipment and supplies to the new LNG terminal being built at Kitimat, BC. The tractor and trailer costs $240,000. Your options are to borrow at an interest rate of 8% (pre-tax) or lease the unit. Neither option will affect revenue. If you lease, the lease payments are $40,000 per year, payable at the beginning of each year, for eight years. If you buy the truck and trailer, you will use a CCA rate of 30%, using the Accelerated Investment Incentive. Initially, assume that both firms have a tax rate of 40%.

What is the discount rate that you should use when finding the PV of the lease in this example?

a) 6.4% - The after-tax cost of debt

b) 4.8% - The after-tax cost of debt

c) 8.0% - The pre-tax cost of debt

d) 5.6% - The after-tax cost of debt

e) 5.4% - The after-tax cost of debt

Assume that if you buy the asset, you will keep it to infinity and not close out the asset class. Under these circumstances, what is the PV of the tax shield from CCA, using the Accelerated Investment Incentive Method?

a) $70,526

b) $81,998

c) $65.487

d) $75,412

e) $84,654

If the truck is not sold once obsolete (the asset pool remains open and CCA is computed out to infinity), should you lease or buy the unit? What is the NAL?

a) Buy: NAL is -$1,831

b) Lease: NAL is - $13,543

c) Buy: NAL is - $13,543

d) Lease: NAL is -$1,831

What is the NPV of the lease to the lessor?

a) -$1,831

b) $13,543

c) -$13,543

d) $1,831