Reference no: EM132467633

Canuck Leasing Inc. is considering either purchasing or leasing a $4,500,000.00 piece of specialized equipment. The specialized equipment has a life of 4 years, belongs in a 30% CCA class, and will have a residual value of $675,000.00. The cost of debt is 9% for this purchase. A 4 lease on the equipment for 4 years is priced at $1,105,500.00 a year. Canuck Leasing Inc.'s corporate tax rate is 35%. The lessor has a tax rate of 40%.

Question a. What is Canuck Leasing Inc.'s break-even lease payment amount?

Question b. What is the amount of annual depreciation Canuck Leasing Inc. can claim in the first year if the firm purchases the equipment?

Question c. What is the net advantage to leasing for Canuck Leasing Inc.? Should they lease or buy?

Question d. Will the decision to lease or buy change for Canuck Leasing Inc. if they had a tax rate of 20% instead?

Question e. What is the net advantage to leasing for the lessor?

Question f. In a leasing arrangement, the cash flows to the lessor are exactly the opposite of the cash flows to the lessee. It would therefore appear that leasing is a zero-sum game where one party benefits at the expense of the other. Given this possibility, why should we expect leasing to occur?