TJ & Parents Inc. has recently decided to go ahead with a new operating system for their business. The cost of the operating system is $3,500,000 and is estimated to have a salvage value of $400,000 in seven years. The CCA rate for the new system is 23% and they will have other assets in this class for at least the next ten years. TJ & Parents Inc. can borrow from the bank at 9% and their current WACC is 12%. They have been offered to lease the new operating system with annual lease payments of $700,000, made at the beginning of each year for seven years. TJ & Parents Inc. marginal tax rate is 26%. Required Should TJ & Parents Inc. buy or lease the new operating system? Show all calculations and round all ending figures to the nearest dollar.
TJ & Parents Inc. has recently decided to go ahead with a new operating system for their business. The cost of the operating system is $3,500,000 and is estimated to have a salvage value of $400,000 in seven years. The CCA rate for the new system is 23% and they will have other assets in this class for at least the next ten years. TJ & Parents Inc. can borrow from the bank at 9% and their current WACC is 12%. They have been offered to lease the new operating system with annual lease payments of $700,000, made at the beginning of each year for seven years. TJ & Parents Inc. marginal tax rate is 26%. Required Should TJ & Parents Inc. buy or lease the new operating system? Show all calculations and round all ending figures to the nearest dollar.
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 14P
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Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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