Airsonics Limited has been asked by Sunny Exploration Limited to provide an air shuttle service to...

 

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Airsonics Limited has been asked by Sunny Exploration Limited to provide an air shuttle service to their oil exploration site. Airsonics will have a two year contract with Sunny with the possibility of renewal for another 4 years. Airsonics has the following choices: Buy the helicopter for $2,000,000, or Arrange a 6 year non cancellable lease, for $400,000 per year, paid at the beginning of each year. Assume that the CCA rate for the helicopter is 30%, and CCA will be claimed at the end of each year. The corporate tax rate is 40%. The weighted average cost of capital is 12% and Airsonics can borrow at 8%. If Airsonics purchases the helicopter, before tax operating cost will be $200,000 per year, payable at the beginning of each year. After 6 years helicopter will be worth either $400,000 or $600,000. Probability that it will worth $600,000 is 3 times as much as that it will worth $400,000. There is 30% chance that after two years contract will not be renewed. In that case helicopter will be sold at a short notice for $1,000,000. Assume asset pool will remain open. If Airsonics leases the helicopter, and contract is not renewed after two years, then Airsonics has to pay a penalty of $300,000 to break the lease. Before tax operating cost will be $150,000 per year, payable at the beginning of the year. Should Airsonics lease or purchase the helicopter? Airsonics Limited has been asked by Sunny Exploration Limited to provide an air shuttle service to their oil exploration site. Airsonics will have a two year contract with Sunny with the possibility of renewal for another 4 years. Airsonics has the following choices: Buy the helicopter for $2,000,000, or Arrange a 6 year non cancellable lease, for $400,000 per year, paid at the beginning of each year. Assume that the CCA rate for the helicopter is 30%, and CCA will be claimed at the end of each year. The corporate tax rate is 40%. The weighted average cost of capital is 12% and Airsonics can borrow at 8%. If Airsonics purchases the helicopter, before tax operating cost will be $200,000 per year, payable at the beginning of each year. After 6 years helicopter will be worth either $400,000 or $600,000. Probability that it will worth $600,000 is 3 times as much as that it will worth $400,000. There is 30% chance that after two years contract will not be renewed. In that case helicopter will be sold at a short notice for $1,000,000. Assume asset pool will remain open. If Airsonics leases the helicopter, and contract is not renewed after two years, then Airsonics has to pay a penalty of $300,000 to break the lease. Before tax operating cost will be $150,000 per year, payable at the beginning of the year. Should Airsonics lease or purchase the helicopter?

Answer rating: 100% (QA)

Since there are two options we will have to take both in consideration The probabilit... View the full answer