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27)Duhok Inc. has decided to acquire a new machine that can either be purchased for $4,200,000...

27)Duhok Inc. has decided to acquire a new machine that can either be purchased for $4,200,000 and depreciated at a 30% CCA rate or leased for a 5-year period for $800,000 per year (due at the beginning of each year). The firm can borrow at 8%, has a 40% marginal tax rate, and 12% WACC. The new machine has an expected useful life of 5 years and an expected salvage value of $1,000,000 at the end of the fifth year. Assume the company has other assets in the same CCA class. Calculate the Net Advantage to Leasing.

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Answer #1

Calculate the Advantage to Leasing machine

Step -1 Present value of annuity calculation

Present value is the amount of money you would need to invest today in order to equate to the total of the annuity payments adjusted for the time value of money.

Present value of lease payment = 800000 × 4.31213 [calculated from present value annuity table]

= 3449704

period interest@8% minimum lease payment lease liability amortization lease liability carrying value
1 - - - 3449704
1 0 800000 800000 2649704
2 211976 800000 588024 2061680
3 164934 800000 635066 1426614
4 114129 800000 685871 740743
5 59259 800000 740743 0
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