A manufacturer offers a $30,000 computer network system under either a financial lease or an operating lease. The system is expected to have a useful life of 6 years and no residual value. The system is eligible for 30% CCA rate on the declining balance. Your firm wants to acquire the system; its tax rate is 40% and the before-tax interest rate on a 6-year term loan is 15%.

a. What are the maximum annual year-end lease payments the manufacturer could demand for your firm to prefer a 6-year financial lease over purchase of the system? Show calculations.

b. Suppose the alternative of operating lease requires annual lease payments of $10,000. In what situation with respect to the useful life of the system the operating lease would be a better alternative for your firm? Show calculations.