BigCo is considering leasing the new equipment that it requires, for $155,000 a year, payable in advance.

Question:

BigCo is considering leasing the new equipment that it requires, for $155,000 a year, payable in advance. The cost of the equipment is $900,000, has a CCA rate of 25% and will last for 6 years. The expected scrap value is $150,000. Assume that the first CCA tax deduction would be taken at the end of the first year. BigCo has lots of other equipment in this asset pool. The tax rate is 30% and the cost of debt is 7%.

a. Should BigCo lease or buy the equipment?

b. What is the maximum lease payment that would make BigCo indifferent between leasing or buying?

Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking...