Reference no: EM132901223
Lease Financing Topic:
Problem 1: Nayyar Construction has confirmed the economic feasibility of a new tower crane and is now trying to decide whether to purchase or lease it. If purchased, the tower crane will cost $980,000, it will be depreciated on a straight-line basis to an estimated salvage value of $50,000 over its five-year useful life, and it will belong to a capital cost allowance (CCA) category with a rate of 30%. The new equipment will qualify for the Accelerated Investment Incentive, and therefore 1.5 times the CCA can be claimed in the year of acquisition. At the time of disposal, there will be assets remaining in the class, and the UCC will be positive after the deduction of the proceeds. If the tower crane is leased, the annual lease payments will be $235,000, payable at the beginning of each of the five years. Nayyar's tax rate is 28%, its cost of capital is 15%, and its after-tax cost of borrowing is 8%. What is the correct calculation of the net value to leasing (NVL), and should Nayyar lease or purchase the crane?
a) NVL = -15,818; Nayyar should purchase the asset.
b) NVL = -8,296; Nayyar should purchase the asset.
c) NVL = -774; Nayyar should purchase the asset.
d) NVL = 53,271; Nayyar should lease the asset.
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