Anderson Enterprises Ltd. is a Canadian corporation wholesaling auto parts in eastern
Canada. The company has decided to begin manufacturing a product that it currently wholesales.
The expansion will require manufacturing equipment costing $80,000.Anderson€™s bank has agreed to provide a term loan to finance the entire purchase. The terms of the loan call for monthly payments of $1,235 for eight years. Due to the high risk, the payment includes interest at 10 1„2%. The bank provides the company with a payment schedule, which is roughly summarized on an annual basis in the table below.

It is estimated that the equipment will have a useful life of 10 years and will be scrapped at the end of that time. Anderson has also obtained some quotes for leasing the equipment. The quote with the most favour able terms involves a six-year lease with monthly payments of $1,565 and an option to renew on an annual basis for a mere $2,000 per year. Anderson likes this alternative because his company would not have to renew after six years if it wanted to acquire more modern equipment.
However, at this point, the company anticipates that it will use the equipment for its useful life of 10 years, at which time it will acquire replacement equipment. Assume the company is subject to a 25% tax rate. It has expansion opportunities that can yield a minimum before-tax return of 22%.
Required:
1. Determine the financial cost to Anderson of leasing rather than owning the manufacturing equipment. Assume that at the end of 10 years, the company will scrap the equipment and purchase new equipment.
2. How would your answer to 1 change if, after 10 years, Anderson Ltd. leased, rather than purchased, the equipment?
3. What other factors, if any, should the company consider when making the decision?

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Year Principal $7,000 7,500 8,500 9,000 10,000 11·000 13,000 14.000 Interest S7,820 7,320 6,320 5,820 4,820 3,820 1.820 820 Total $14,820 14,820 14,820 14.820 14,820 14,820 14,820 14,820