Based on last year’s Statement of Comprehensive Income, the company’s marginal tax rate was 35%. Before making the decision to buy or lease, Richard would like to carefully weigh the pros and cons of leasing versus borrowing and buying. However, the decision must be made soon, as the old refrigeration units are “on their last legs”!Questions: If NRC’s tax rate is also 35%, what would be the NAL from the point of view of the lessor, assuming that all the relevant cash flows remain the same? What principle is demonstrated here?If NRC’s tax rate is 40%, what is the minimum lease payment that it would accept? Assume that due to NRC’s favourable position in the industry, it will be able to resell the equipment for $55,000 after six years. 3)If Richard leases the refrigeration units, how will this affect his debt capacity? Case 2: Leasing CaseMr. Bai Li emigrated from Malaysia to Canada in 1993. He landed in Edmonton, Alberta, andstarted his working life in Canada a national grocery store chain. He stayed with the samecompany for 10 years, working first as a stocker, then at the check-out counter, thenbecoming a supervisor and finally, the branch manager. When he had saved up enoughmoney, Mr. Li quit his job and moved to Bonnyville, Alberta to open his own grocery store in2003. He named the store Fast and Furious Supermarket, after his favourite movie. In2009, after six years of being in business on his own, Mr. Li (who preferred to be calledRichard) had established himself as a respectable businessman and a pillar of the localcommunity. His friendly demeanour and gregarious nature had contributed to the popularityof his store as a grocery shopping destination for local residents and shoppers from manysurrounding counties. Richard had also established a good business relationship with thelocal branch of the Bank of Scotia.Richard is now thinking of replacing the aging refrigeration units in his store. He inheritedthe equipment from the previous store owner, who purchased them in 2002. The units havebroken down numerous times recently, necessitating extensive repairs costing almost$5,000, without accounting for the loss of inventory and business during the breakdown.Richard is trying to decide whether he should borrow money from his bank to buy the newrefrigeration units outright, or to lease them. After some research on the Internet, Richardfound a great leasing deal offered by the National Refrigeration Company (NRC). Afterseveral phone conversations and a face-to-face meeting, NRC's leasehold manager, Mr. Fife,sent the following details on the proposed lease:Type of lease: Short-term, cancellable with two-weeks' noticeLength of lease: six yearsLease payment: $5,500 per month, payable at the beginning of every monthPurchase option: $50,000 at the end of the sixth yearMaintenance and upkeep will be performed by NRC at no cost to Fast and FuriousSupermarket.NRC will be responsible for the insurance of the equipment.Richard estimates that the new refrigeration units will save him $20,000 in lower electricitybills as well as lower spoilage and maintenance costs per year, not to mention fewerheadaches if the units ever broke down. The new units are also more spacious and wouldallow Richard to stock more frozen foods that are popular with his customers. He estimatesthat his revenues would increase by at least $60,000 per year with these new units. He alsoestimates that the old refrigeration units would not have any resale value.Being "old school," Richard would prefer to simply borrow money from the bank, buy thenew units outright, and then use the extra revenues earned from the new units to pay backthe bank as quickly as possible. He asked NRC how much it would cost if he purchased theunits outright, and was quoted a price of $300,000, which included the installation serviceprovided by NRC. He then went to talk with the loan manager at his bank, who informedhim that he should be able to borrow the funds at 12% APR compounded annually.Richard estimates that after six years, he could sell the equipment for $45,000, after whichhe would have to replace the units again. If he purchases the units, he estimates that hewould have to pay annual maintenance costs of about $3,500. After checking the website ofthe Canada Revenue Agency (CRA), Richard found that the units could be depreciated at aCCA rate of 30%, and the half-year rule would apply to the first year's depreciation amount.

Lease Lease agreements are contracts or instruments that transfer property from one person to…

Answered: Based on last year’s Statement of…

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q