Question

Kumquat Farms Ltd. has decided to acquire a kumquat picking machine. The cost of the picking machine is $45,000, and it has an economic life of 10 years. At the end of seven years, the market (salvage) value is estimated to be $11,000. Seven years is the time horizon for analysis. The owner of Kumquat Farms Ltd. has discussed this acquisition with his financial services conglomerate. It has agreed to lend him the purchase price at 10 percent per year, payable in equal blended payments at the end of each year, for seven years. An alternative method of financing the equipment would be to lease it from the local leasing store. Annual lease payments, payable at The equipment has a CCA of 20 percent. The benefits of any tax shields are realized at the end of each year. The company's tax rate is 25 percent. Kumquat Farms' cost of capital is 16 percent 0-1. Calculate PV cost of lease alternative. (Do not round intermediate calculations. Round the final answer to nearest whole dollar. PV cost Ncost $ 36307 -2. Calculate PV cost of borrowing/purchase alternative. (Do not round Intermediate calculations. Round the final answer to nearest whole dollar. Input the answer as positive value.) PV cost $ 24593 b. Should Kumquat Farms Ltd lease or buy the picking machine?

Answer 1

Answer,

Present value of cost on lease alternative = $ 36,307

Equallant cost per year = 36307/ 7 =5187

Present value of cost on Borrowing/purchase alternative = $ 24,593

Equallant cost per year = 24593 / 7 =3513

Borrowing or purchasing option have less PV of cost.So Kumquat Farms should buy the picking machine.