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 $25000 and has a five year expected lifespan, and no residual value is expected. if purchased, asset would be financed through a term loan at 12%. The loan calls for equally payment to be made at end of end year for five years. Suppose that the equipment would qualify for CCA on a straight-line basis over five years. Required: 1. Calculate the cash flows for each financing alternate. 2. Which alternative is the most economical.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:The smiths are not sure whether they should buy or lease equipment. A five year lease could be arranged with annual
lease payment of 5000$ 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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