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%.

1. If the asset pool is closed at the end of eight years and you take a terminal loss at the end of year 8 equal to the undepreciated capital cost, what happens to the NAL to both the lessee and the lessor, assuming they both have a 40% tax rate?

a. NAL to the Lessee becomes -$16,556

b. NAL to the Lessor becomes -$16,556

c. NAL to the Lessee becomes +$16,556

d. NAL to the Lessor becomes +$16,556

e. a. and d. above are true

2. If the lessee has a zero percent tax rate, what is the maximum lease payment the lessee will be willing to make:

a. $36,793

b. $40,000

c. $39,669

d. $38,670

e. $37,884

3.If the lessor has a 40% tax rate, what is the minimum annual lease payment the lessor will accept?

a. $36,793

b. $37,884

c. $38,670

d. $39,669

e. $40,000