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It is time for the renewal of existing photocopying equipment at Runt Ltd. New equipment will cost $95,000 and this amount can be borrowed from the local bank at 7 percent interest with annual payments at the end of the year. The CCA rate on the equipment would be 20 percent. The equipment will be salvaged in 5 years for $24,000. The current equipment is worth $12,500. Runt could also lease the equipment with annual lease payments of $20,000 payable at the beginning of each year, which would avoid the annual maintenance expense of $1,250 involved if they purchase the equipment. Cost of capital is 14 percent. The tax rate is 40 percent. In this lease vs borrow to purchase problem: 1. The present value of the lease payments is: O($17,812) O($92,257) O($17,326) O($15,849) 2. What is the present value of the tax-savings of lease payments? O$8,324 O$35,415 O$17,326 O$12,849 3. PV of maintenance payments is: 4. PV of salvage value is: 5: PV CCA is: 0 0

It is time for the renewal of existing photocopying equipment at Runt Ltd. New equipment will cost $95,000 and this amount can be borrowed from the local bank at 7 percent interest with annual payments at the end of the year. The CCA rate on the equipment would be 20 percent. The equipment will be salvaged in 5 years for $24,000. The current equipment is worth $12,500. Runt could also lease the equipment with annual lease payments of $20,000 payable at the beginning of each year, which would avoid the annual maintenance expense of $1,250 involved if they purchase the equipment. Cost of capital is 14 percent. The tax rate is 40 percent. In this lease vs borrow to purchase problem: 1. The present value of the lease payments is: O($17,812) O($92,257) O($17,326) O($15,849) 2. What is the present value of the tax-savings of lease payments? O$8,324 O$35,415 O$17,326 O$12,849 3. PV of maintenance payments is: 4. PV of salvage value is: 5: PV CCA is: 0 0

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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It is time for the renewal of existing photocopying equipment at Runt Ltd. New equipment will cost $95,000 and this amount can be borrowed from the local bank at 7 percent interest with annual payments at the end of the year. The CCA rate on the equipment would be 20 percent. The equipment will be salvaged in 5 years for $24,000. The current equipment is worth $12,500. Runt could also lease the equipment with annual lease payments of $20,000 payable at the beginning of each year, which would avoid the annual maintenance expense of $1,250 involved if they purchase the equipment. Cost of capital is 14 percent. The tax rate is 40 percent. In this lease vs borrow to purchase problem: 1. The present value of the lease payments is: O($17,812) O($92,257) O($17,326) O($15,849) 2. What is the present value of the tax-savings of lease payments? O$8,324 O$35,415 O$17,326 O$12,849 3. PV of maintenance payments is: 4. PV of salvage value is: 5: PV CCA is:
Transcribed Image Text:It is time for the renewal of existing photocopying equipment at Runt Ltd. New equipment will cost $95,000 and this amount can be borrowed from the local bank at 7 percent interest with annual payments at the end of the year. The CCA rate on the equipment would be 20 percent. The equipment will be salvaged in 5 years for $24,000. The current equipment is worth $12,500. Runt could also lease the equipment with annual lease payments of $20,000 payable at the beginning of each year, which would avoid the annual maintenance expense of $1,250 involved if they purchase the equipment. Cost of capital is 14 percent. The tax rate is 40 percent. In this lease vs borrow to purchase problem: 1. The present value of the lease payments is: O($17,812) O($92,257) O($17,326) O($15,849) 2. What is the present value of the tax-savings of lease payments? O$8,324 O$35,415 O$17,326 O$12,849 3. PV of maintenance payments is: 4. PV of salvage value is: 5: PV CCA is:
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