The Kay-Pal Corporation is debating whether to acquire an asset through an operating lease arrangement or...
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The Kay-Pal Corporation is debating whether to acquire an asset through an operating lease arrangement or to borrow funds and purchase the asset. The purchase price of the asset, $100,000, can be financed with a four-year, 10% bank loan. If purchased, the asset will be placed in a CCA class of 30% with an expected salvage of $9,000, at the end of its four-year life. Annual before-tax costs of service and repair are estimated at $2,000 under the purchase option. Alternatively, the firm can obtain the use of the asset with an operating lease of four years. The lease payments would be $32,000 per year. The firm's tax rate is 40% and its cost of capital is 16%. Lease payments are to be paid at the beginning of each year. Which alternative should be selected based on minimizing the present value of after-tax costs? Show full details for all steps to support your conclusions. 7 A B I ✓ 8 8 I 31 3: 2? The Kay-Pal Corporation is debating whether to acquire an asset through an operating lease arrangement or to borrow funds and purchase the asset. The purchase price of the asset, $100,000, can be financed with a four-year, 10% bank loan. If purchased, the asset will be placed in a CCA class of 30% with an expected salvage of $9,000, at the end of its four-year life. Annual before-tax costs of service and repair are estimated at $2,000 under the purchase option. Alternatively, the firm can obtain the use of the asset with an operating lease of four years. The lease payments would be $32,000 per year. The firm's tax rate is 40% and its cost of capital is 16%. Lease payments are to be paid at the beginning of each year. Which alternative should be selected based on minimizing the present value of after-tax costs? Show full details for all steps to support your conclusions. 7 A B I ✓ 8 8 I 31 3: 2?
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Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
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