Exotic Mango Farms Ltd. is considering whether to borrow funds and purchase a mango picking machine or
Question:
Exotic Mango Farms Ltd. is considering whether to borrow funds and purchase a mango picking machine or lease the asset under an operating lease arrangement. The lease would be from the local leasing store with annual lease payments, payable at the beginning of each of the next 5 years (the time horizon for the analysis), of $10,000.
As an alternative, the owner approached his bank to enquire about a loan to purchase the printing machine. The cost of the machine is $51,000 and, at the end of 5 years, the market (salvage) value is estimated to be $15,000. The bank has informed him that they would charge 8 percent per year (payable annually, at the end of each year).
The equipment has a CCA rate of 25 percent. The benefits of any tax shields are realized at the end of each year. The company's tax rate is 20 percent. Bowden Printing's cost of capital is 15 percent.
Required:
Record your answers and use the space below to support those answers:
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta