Your company wants to purchase a new wax pouring machine for your candle-making business. The machine...

  

 

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Your company wants to purchase a new wax pouring machine for your candle-making business. The machine costs $240,000. It will be obsolete in three years with zero salvage value. Your options are: 1. To borrow & buy the machine, at an interest rate on debt of 10%, or; 2. Lease the machine. If you lease, the lease payments are $90,000 per year, payable at the beginning of each year. If you buy the sequencer, you will use a CCA rate of 30%, calculated using the Accelerated Investment Incentive Method, and the asset pool will remain open after the machine becomes obsolete. The tax rate is 30%. Initial Cost Lease Payments Lease Tax Shield CCA Tax Shield Terminal Loss Tax Shield Salvage Value Annual Cash Flows PV of Annual Cash Flows Net Advantage to Leasing 0 $240,000 Time Period 1 2 3 What is the after-tax cost of debt that you should use for computing the PV of the lease? 010% 07% 06% 08% 09% If you buy the machine, what is the PV of the tax shield from CCA? OThe PV of the tax shield from CCA is $60,288 OThe PV of the tax shield CCA is $67,758 OThe PV of the tax shield from CCA is $56,469 ONone of the above are correct What is the Net Advantage to Leasing (NAL) for the Lessee? OThe NAL is-$2,153 OThe NAL is -$1.666 The NAL is +$245 OThe NAL is $245 ONone of the above are correct ONone of the above are correct Based on your analysis above, what action should the company take? OThey should lease the asset OThey should buy the asset OThe company is indifferent between leasing and buying. In general, which of the following statements are correct with respect to leasing? CLeasing is most advantageous when the Lessee has a low tax rate and the Lessor has a high tax rate Cleasing is most advantageous when the Lessee has a high tax rate and the Lessor has a low tax rate OThe true value of leasing arises due to the fact that leases do NOT have to appear on the Balance Sheet of the Lessee (if it is an Operating Lease) OAll of the above are true COnly a) and c) are true Your company wants to purchase a new wax pouring machine for your candle-making business. The machine costs $240,000. It will be obsolete in three years with zero salvage value. Your options are: 1. To borrow & buy the machine, at an interest rate on debt of 10%, or; 2. Lease the machine. If you lease, the lease payments are $90,000 per year, payable at the beginning of each year. If you buy the sequencer, you will use a CCA rate of 30%, calculated using the Accelerated Investment Incentive Method, and the asset pool will remain open after the machine becomes obsolete. The tax rate is 30%. Initial Cost Lease Payments Lease Tax Shield CCA Tax Shield Terminal Loss Tax Shield Salvage Value Annual Cash Flows PV of Annual Cash Flows Net Advantage to Leasing 0 $240,000 Time Period 1 2 3 What is the after-tax cost of debt that you should use for computing the PV of the lease? 010% 07% 06% 08% 09% If you buy the machine, what is the PV of the tax shield from CCA? OThe PV of the tax shield from CCA is $60,288 OThe PV of the tax shield CCA is $67,758 OThe PV of the tax shield from CCA is $56,469 ONone of the above are correct What is the Net Advantage to Leasing (NAL) for the Lessee? OThe NAL is-$2,153 OThe NAL is -$1.666 The NAL is +$245 OThe NAL is $245 ONone of the above are correct ONone of the above are correct Based on your analysis above, what action should the company take? OThey should lease the asset OThey should buy the asset OThe company is indifferent between leasing and buying. In general, which of the following statements are correct with respect to leasing? CLeasing is most advantageous when the Lessee has a low tax rate and the Lessor has a high tax rate Cleasing is most advantageous when the Lessee has a high tax rate and the Lessor has a low tax rate OThe true value of leasing arises due to the fact that leases do NOT have to appear on the Balance Sheet of the Lessee (if it is an Operating Lease) OAll of the above are true COnly a) and c) are true

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