Lease or Buy Equipment (look to Self-Test Exercise 8.8 for example) The Smith are not sure whether they should buy or lease equipment. A five-year lease could be arranged with annual lease payments of $6,000, payable at the beginning of each year. The tax shield from lease payments is available at year end. The company's tax rate is 25%. The equipment would cost $30,000 and has a five-year expected lifespan, and no residual value is expected. If purchased, the asset would be financed through a term loan at 15%. The loan calls for equal payments to be made at the end of each year for five years. Suppose that the equipment would qualify for CCA on a straight-line basis over five years. Required: Calculate the cash flows for each financing alternative. Which alternative is the most economical?
Lease or Buy Equipment (look to Self-Test Exercise 8.8 for example) The Smith are not sure whether they should buy or lease equipment. A five-year lease could be arranged with annual lease payments of $6,000, payable at the beginning of each year. The tax shield from lease payments is available at year end. The company's tax rate is 25%. The equipment would cost $30,000 and has a five-year expected lifespan, and no residual value is expected. If purchased, the asset would be financed through a term loan at 15%. The loan calls for equal payments to be made at the end of each year for five years. Suppose that the equipment would qualify for CCA on a straight-line basis over five years. Required: Calculate the cash flows for each financing alternative. Which alternative is the most economical?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Lease or Buy Equipment (look to Self-Test Exercise 8.8 for example)
The Smith are not sure whether they should buy or lease equipment. A five-year lease could be arranged
with annual lease payments of $6,000, payable at the beginning of each year. The tax shield from lease
payments is available at year end. The company's tax rate is 25%. The equipment would cost $30,000
and has a five-year expected lifespan, and no residual value is expected. If purchased, the asset would
be financed through a term loan at 15%. The loan calls for equal payments to be made at the end of
each year for five years. Suppose that the equipment would qualify for CCA on a straight-line basis over
five years.
Required: Calculate the cash flows for each financing alternative. Which alternative is the most
economical?
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