Question

A piece of equipment costs $125,000 today to buy, but company YGR Inc. (whose cost of capital = 7.25%) is considering a lease arrangement. The kit has an approximate lifespan of 8 years, at which time the salvage value = is $15,000. Annual maintenance costs (performed at year-end) are expected to be $1,550 (these are to grow by 3% per year). If the PV of the CCA tax shield and PV of lease payments are $32,550 and $72,400, respectively, should YGR Inc. lease the equipment?

Answer 1

YGR Inc. should not lease the equipment.

Step-by-step explanation:

In order to determine whether YGR Inc. should lease the equipment, we need to compare the present value (PV) of the CCA tax shield and the PV of lease payments with the cost of buying the equipment. The PV of the CCA tax shield is $32,550 and the PV of lease payments is $72,400.

If the present value of the tax shield and lease payments is greater than the cost of buying the equipment, then YGR Inc. should lease the equipment. In this case, the total present value is $32,550 + $72,400 = $104,950, which is less than the cost of buying the equipment ($125,000).

Therefore, YGR Inc. should not lease the equipment.