You own a high-tech manufacturing entity. You would like to expand your operations but to do so
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Question:
You own a high-tech manufacturing entity. You would like to expand your operations but to do so you need to either lease or buy a $1.2 million piece of equipment for the next three years. The lease payments would be $475,000 a year for the three years with the first payment due upon signing the lease and the lease has a 12.12% interest rate.. If the equipment is purchased, it will be depreciated using the declining balance method with a 30% CCA rate. over the three-year period. The equipment will have a residual value of $500,000 at the end of the three years. Should the equipment be leased, the lessor and the lessee will both have marginal tax rates of 34%. The company has a WACC of 7.992%
What is the present value of the CCA tax shield?
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