Tim's Lawn Care (TLC) is looking at expanding its business:

They hope to buy 5 lawnmowers this year, and sell them for scrap at $50 each in 6 years. The mowers will cost $1,100 each to buy.  It is hoped that each summer a mower will produce an EBITDA of $1,000 (for 6 years). No changes in NWC accounts are expected.  Tax rate is 30%, CCA rate on the mowers will be 20%, and TLC requires a 15% return.  If the mowers were purchased, TLC would finance the purchase with a loan from the bank paying 9%. 

 a)  Calculate the NPV and IRR of this project.  Should TLC proceed with the investment?

 b) Alternatively, instead of buying the lawn mowers TLC is offered to lease each mower at a cost of $300 per year for 6 years. If TLC decides to go through with the expansion, should it lease or buy the mowers?

Answer rating: 100% (QA)

To calculate the NPV Net Present Value and IRR Internal Rate of Return of the project well consider both scenarios buying the lawnmowers and leasing t... View the full answer