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Webster's Tree Farm is considering the purchase of a backhoe costing $47,000. The backhoe can be...

Webster's Tree Farm is considering the purchase of a backhoe costing $47,000. The backhoe can be leased for 5 years at $13,900 per year or it can be purchased at an interest rate of 7 percent. The estimated life of the backhoe is 5 years after which time it will be worthless. The corporate tax rate is generally 35 percent. However, the company does not expect to owe any taxes for the next 6 years due to accumulated net operating losses. The backhoe belongs in a 20 percent CCA class. What is the net advantage to leasing?

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Answer #1

Note: As Tax is not payable for 6 years, Depreciation is IRRELEVANT.

Year Discounting Factor
[1/(1.07^year)]		 Cash Flow PV of Cash Flows
(cash flow*discounting factor)
0 1 -47000 -47000
1 0.934579439 13900 12990.65421
2 0.873438728 13900 12140.79832
3 0.816297877 13900 11346.54049
4 0.762895212 13900 10604.24345
5 0.712986179 13900 9910.507895
NPV =
Sum of PVs		 9992.74436

Therefore, Net LOSS or COST of Leasing (instead of purchasing) is $9992.74

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