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Define discount rate appropriate for the residual value

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Question: Halifax Company has decided to acquire equipment costing $ 1 00,000. Capital cost allowances could be taken at a rate of 20 percent. The estimated life of the equipment is 10 years and the scrap value at the end of the 10th year is estimated to be $3,000. The asset can be purchased using an 8-percent bank loan, which would be repaid in equal amounts for 10 years, or leased at $ 16,000 a year. Payments under both the loan and the lease are made at the end of each year. The firm's tax rate is 40 percent, and the discount rate appropriate for the residual value would be 12 percent. Should the firm lease or purchase?

Reference no: EM131750580

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