Question

Alpha Ltd. considers modernizing its facilities. As part of that process, Alpha has the option of buying the production system for $75,000 or leasing them for 5 years. Alpha would be able to finance 100% of the purchase with a 5 year 7% loan. If purchased, Alpha would also purchase a 5-year maintenance contract for $880 per year, payable at the year-end. Annual lease payments, including maintenance, would cost $18,300. There is not expected to be any residual value at the end of the lease. Alpha’s tax rate is 28%, and the equipment falls into Class 8 with a 20% CCA rate. You are required to answer the following questions:

(1) Should Alpha buy or lease the production system?

(2) If the production system had a residual value of $10,000, what difference would that make to the leasing decision?

(3) If the government changed the CCA rate for the machines to 50%, what would be the new NAL?

(4) Should Alpha lease if it can borrow at 5%?