Problem #3 (18 marks) Maxine's is considering either purchasing or leasing a $6.3 million piece of specialized equipment. The equipment has a life of 4 years, belongs in a 30% CCA class, and will have no residual value. Furthermore, lease qualifies as tax lease. The pre-tax cost of debt is 8% for this purchase. A lease on the equipment for 4 years is priced at $1.875 million a year, payable at the beginning of each year. Maxine's corporate tax rate is 37%.

a) What is the net advantage to leasing for Maxine? (4 marks)

b) What is Maxine's break-even lease payment amount? (4 marks)

c) Do you think Maxine's should buy or lease the equipment under the current contract? After negotiating with the lessor, Maxine's can lease the equipment at $1.7 million per year. Will you change your mind? Please explain your answers (3 marks)

d) After talking with the current lessor, Maxine's also negotiates a new lease agreement with another potential lessor for new specialized equipment, which belongs to a different asset class, that is worth $6.5 million. The equipment will have a life of 4 years and belongs in a 40% CCA class. The lessor will be responsible for the operating costs under the terms of the lease. If the specialized equipment is purchased, it will have a salvage value at the end of the 4 years of $0.5 million. However, if Maxine's purchases the equipment, Maxine's will have annual operating costs of $0.25 million. A lease on the equipment for 4 years is priced at $1.7 million a year, payable at the beginning of each year. All the other terms are similar as stated in the main question. Please help Maxine's decide if they should buy or lease the equipment. (7 marks) Winter 2023 3 Problem

#4 (15 marks) Jamestown Industries is contemplating the acquisition of some new equipment. The purchase price is $40,000. The equipment has a 4-year life after which time it will be worthless. Furthermore, lease qualifies as tax lease. The equipment belongs in a 35 percent CCA class. The equipment can be leased for $11,000 a year. Furthermore, there is an increase in maintenance cost of $15,000, no matter whether the firm decide to buy or lease the new equipment. The firm can borrow money at 7 percent and has a 35 percent tax rate. Payments are made at the beginning of the year.

a) Please calculate net advantage to leasing for Jamestown Industries (4 marks)

b) The lessor also gives Jamestown Industries an option that ownership of the equipment will be automatically transferred to the lessee by the end of the term of the lease. If Jamestown Industries wants the leasing to have minimal impact on its financial statement, will the company accept the option? Please explain your answer. (3 marks)

c) What's your decision to buy or lease if the equipment belongs in a 60 percent CCA class. Please show all of your work. (5 marks)

d) The executive team of Jamestown Industries is still a little concerned with leasing the equipment. Please provide three primary benefits to leasing (3 marks)