Company Inc's most recent Statement of Financial Position is given below.

Company Inc. Statement of Financial Position As at Dec 31, 2021

Assets

Cash 425,000$

Accounts Payable 300,000$

Accounts Receivable 400,000$

Inventories 500,000$

Total Current Assets1,325,000$

Net Fixed Assets18,000,000$

Total Assets19,325,000$

Liabilities

Accounts Payable 300,000$

Other Current Liabilities 425,000$

Total Current Liabilities 725,000$

LT Debt 2,500,000$

Common Stock (85,000 shares o/s) 4,500,000$

Retained Earnings 11,600,000$

Total Liabilities & Owners Equity 19,325,000$

Additional Information:

• • Current market price per common share = $ 195
• • Before tax cost of borrowing (secured loan) = 5%
• • Weighted Average Cost of Capital =12%
• • Net Income for 2021 = $925,000
• • Target D/E ratio based on market values = 0.25
• • Corporate tax rate = 35% 1.
•  One of the projects Company is considering involves purchasing a new piece of manufacturing equipment. The capital budgeting analysis indicates that the equipment has a positive NPV of $500,000. The required initial investment in working capital for the project amounts to $50,000 payable at the beginning of the year and is growing at 10% annually over the life of the project. The equipment costs $1,400,000 to purchase, has a five-year useful economic life, and is a class 10 asset that has a CCA rate of 30% (assume the half-year rule applies). The salvage value of the equipment is $350,000 at the end of the five-year period. The equipment can be leased from Accel Leasing for five years for $300,000 per year, with the first payment payable at the beginning of the year. If Evergreen purchases the equipment, it will have annual operating costs of $50,000 per year. Under the terms of the lease, Accel will be responsible for the operating costs. Assume that the lease is a tax lease (qualified by the CRA for tax purposes). 
• Calculate the Net Advantage of Leasing and explain whether the firm should buy or lease the asset.

Answer rating: 100% (QA)

The Net Advantage of Leasing is 500000 The firm should buy the asset EXPLANATION The Net Adv... View the full answer