Reference no: EM132722715
1. Clayton, Ltd. is going to install $2,000,000 of new equipment in its manufacturing plant. Clayton could obtain a bank loan for the full amount, but is also investigating a lease financing plan. The following data relate to the lease vs. purchase decision.
a) The new equipment is subject to a declining balance CCA (depreciation) rate of 35%. The capital cost is $2,000,000.
b) Clayton has a tax rate of 40%.
c) Clayton can obtain a bank loan at an interest rate of 12%.
d) The lease under investigation proposes lease payments of $350,000 at the beginning of each year for five years.
e) At the end of the five years, the equipment would have a market or salvage value of $100,000.
Find the net advantage to leasing. In finding the net advantage to leasing, you will have to consider the cost of owning equipment, and leasing cash flows.
1) Find the present value of the appropriate leasing cash flows.
2) Find the present value of the CCA tax shield using the short-cut formula that we have been using in class.
3) Find the net advantage to lease.
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