Reference no: EM133050007

Question - In order to alleviate its somewhat strained cash position, Storerite Corporation considers signing a sale-and-leaseback arrangement with a finance company on one of its warehouses. Under the arrangement, Storerite would sell the warehouse fnr $1,500,000 and then lease it back over a 10-year term for annual lease payments of $200,000. Lease payments are due at the beginning of each year, with tax shields available at year end. $600,000 of the $1,500,000 selling price is deemed to be the value of the building, and the remaining $900,000 is the value of the land. CCA on the building is taken on a declining balance at a rate of 10 percent. At the end of lO years, the building is likely to be worthless, but the land is expected to appreciate at the average inflation rate, which is anticipated to be 5 percent per year. An appropriate risk-adjusted discount rate for the residual land value would be 14 percent. Storerite can float 10-years debit at an interest rate of 12 percent, and its tax rate is 50 percent. Is the lease financing attractive?