The smiths are not sure whether they should buy or lease equipment. A five year lease could be arranged with annual lease payment of 5000$ payable at beginning of each year. The tax shield from lease payment is available at year end. The company tax rate is 25%. The equipment would cost $25000 and has a five year expected lifespan, and no residual value is expected. if purchased, asset would be financed through a term loan at 12%. The loan calls for equally payment to be made at end of end year for five years. Suppose that the equipment would qualify for CCA on a straight-line basis over five years. Required: 1. Calculate the cash flows for each financing alternate. 2. Which alternative is the most economical.
The smiths are not sure whether they should buy or lease equipment. A five year lease could be arranged with annual lease payment of 5000$ payable at beginning of each year. The tax shield from lease payment is available at year end. The company tax rate is 25%. The equipment would cost $25000 and has a five year expected lifespan, and no residual value is expected. if purchased, asset would be financed through a term loan at 12%. The loan calls for equally payment to be made at end of end year for five years. Suppose that the equipment would qualify for CCA on a straight-line basis over five years. Required: 1. Calculate the cash flows for each financing alternate. 2. Which alternative is the most economical.
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 9P
Related questions
Question
![The smiths are not sure whether they should buy or lease equipment. A five year lease could be arranged with annual
lease payment of 5000$ payable at beginning of each year. The tax shield from lease payment is available at year end.
The company tax rate is 25%. The equipment would cost $25000 and has a five year expected lifespan, and no residual
value is expected. if purchased, asset would be financed through a term loan at 12%. The loan calls for equally payment to
be made at end of end year for five years. Suppose that the equipment would qualify for CCA on a straight-line basis
over five years. Required:
1. Calculate the cash flows for each financing alternate.
2. Which alternative is the most economical.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F4839173c-c6a1-4c2a-940f-7c13971d0732%2F9f9fc824-812c-48c1-b69a-fdc291ba6878%2Fktllar_processed.jpeg&w=3840&q=75)
Transcribed Image Text:The smiths are not sure whether they should buy or lease equipment. A five year lease could be arranged with annual
lease payment of 5000$ payable at beginning of each year. The tax shield from lease payment is available at year end.
The company tax rate is 25%. The equipment would cost $25000 and has a five year expected lifespan, and no residual
value is expected. if purchased, asset would be financed through a term loan at 12%. The loan calls for equally payment to
be made at end of end year for five years. Suppose that the equipment would qualify for CCA on a straight-line basis
over five years. Required:
1. Calculate the cash flows for each financing alternate.
2. Which alternative is the most economical.
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