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:Homework For You

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(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.

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(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

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