Shaista Company is considering leasing a warehouse under a 10-year financial lease with lease payments of...

 

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Shaista Company is considering leasing a warehouse under a 10-year financial lease with lease payments of $120,000 at the end of each year. The warehouse is valued at $2 million, $1.2 million of which is the land value and the remaining $800,000 is the value of the building. The building is eligible for CCA rate of 10% on the declining balance. At the end of the 10 years, the building will have no residual value, but the land will have appreciated at 3% per year over the 10-year lease period. An appropriate risk-adjusted discount rate for the residual land value would be 15%. The company can take a 10-year term loan at 10% annual interest rate and its tax rate is 40% and the capital gain, if any, will be taxed at half of this rate. Required: Should Shaista undertake lease financing? Show calculations to support your answer. Shaista Company is considering leasing a warehouse under a 10-year financial lease with lease payments of $120,000 at the end of each year. The warehouse is valued at $2 million, $1.2 million of which is the land value and the remaining $800,000 is the value of the building. The building is eligible for CCA rate of 10% on the declining balance. At the end of the 10 years, the building will have no residual value, but the land will have appreciated at 3% per year over the 10-year lease period. An appropriate risk-adjusted discount rate for the residual land value would be 15%. The company can take a 10-year term loan at 10% annual interest rate and its tax rate is 40% and the capital gain, if any, will be taxed at half of this rate. Required: Should Shaista undertake lease financing? Show calculations to support your answer.

Answer rating: 100% (QA)

SOLUTION To determine whether Shaista Company should undertake lease financing we need to compare the present value of the lease payments with the pre... View the full answer