Problem for Leasing Assignment | Homework For You
Problem #4 Problem 4 Leasing (10 Marks) Berrick Industries has undergone a capital budgeting NPV analysis and has determined they should acquire NS. some specialized equipment for their gold exploration off the coast of Jane has been hired as a Co-op student for the summer and has been asked to do a NAL analysis to determine whether it would make more sense to lease or purchase the asset. Jane has examined the proposed lease and has determined the following:
(1) The equipment has a purchase price of $1,400,000 and has a seven-year useful life.
(2) The estimated salvage value is $350,000 in seven years.
(3) If Berrick acquires the equipment (accepts the project), they will generate after-tax cash flows of $118,000 per year.
(4) If Berrick purchases the equipment, it will cost the firm $25,000 today in training costs and these training costs will be expensed for income tax purposes. Under the terms of the lease, the lessee will be responsible for training costs.
(5) If they lease the equipment from Orca Enterprises, the lease payments will be 575,000 per year for 7 years with the payments made at the beginning of the year.
(6) If the asset is purchased, Berrick Industries will be responsible for maintenance costs of S10,000 per year; if leased, the lessor will be responsible for maintenance costs.
(7) The asset belongs in an asset class with a CCA rate of 30%.
(8) If the asset is leased, the cost to insure the asset would be more expensive, requiring the lessee to pay an additional $4000 per year (to be paid at the beginning of the year).
(8) Berrick Industries has a marginal tax rate of 40%. The before- tax cost of debt is 10%. The lease qualifies as a true tax lease for tax purposes.
a. Should Berrick Industries buy or lease the equipment? Show all your work. (8 marks) Get Finance homework help today