Sprite Canada has decided to acquire a bottling machine for its existing plant. The cost of the machine is $450,000. In five years the machine is expected to have a salvage value of $150,000. Bank of Nova Scotia has agreed to advance funds for the entire purchase price at 8 percent per annum payable in equal instalments at the end of each year over the five years. As an alternative, the machine could be leased over the five years from the manufacturer, Metalworks LTD., with an annual lease payments of $100,000 payable at the beginning of each year. Sprite Canada's tax rate is 40 percent. Its cost of capital is 15 percent, and its tax shields are realized at the end of the year. Bottling machines have a CCA rate of 20 percent. If the machine is owned, annual maintenance costs will be $5,000. Required: Should Sprite Canada lease or buy its machine? Show all calculations.

Sprite Canada has decided to acquire a bottling machine for its existing plant. The cost of the machine is $450,000. In five years the machine is expected to have a salvage value of $150,000. Bank of Nova Scotia has agreed to advance funds for the entire purchase price at 8 percent per annum payable in equal instalments at the end of each year over the five years. As an alternative, the machine could be leased over the five years from the manufacturer, Metalworks LTD., with an annual lease payments of $100,000 payable at the beginning of each year. Sprite Canada's tax rate is 40 percent. Its cost of capital is 15 percent, and its tax shields are realized at the end of the year. Bottling machines have a CCA rate of 20 percent. If the machine is owned, annual maintenance costs will be $5,000. Required: Should Sprite Canada lease or buy its machine? Show all calculations.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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