The company Ogivac Inc. has the possibility of buying a property costing 70 000 $ and which is depreciable, for tax purposes, at the declining rate of 30%. The value expected residual at the beginning of year 5 is nil. Another possibility available to the company consists of renting this property for 4 years in return for annual rents of $23,000 payable at the end of the year (the tax savings relating to the rent are also achievable at the end of the year). If the company buys the property, it will take out a loan bank of $70,000, at an annual rate of 12%, offering the property as security. the repayment of this loan will be made by means of a series of four instalments year-end uniforms. The company's tax rate of 40% and its cost of capital of 17%. 

A) What should the company do? 

B) If the rents were due at the beginning of the year and the relative tax savings to the rents achievable at the end of the year, would your answer be the same as that en A)? 

C) Repeat A) assuming that the residual value of the property will be $5,000 at the beginning of year 5. 

D) According to the calculations made in B), what would be the maximum amount of rent beyond used the company should opt for the purchase of the good?

Answer rating: 100% (QA)

Lets break down the problem step by step to answer each part A Buy the Property or Rent and Invest the Money Buying the Property Cost of Property 70000 Depreciation 30 declining balance Depreciation f... View the full answer