Question

Big Bucks Inc. (BBI) has decided to replace its outdated computer system, which has no resale value. It is now considering two choices: (i) purchase the necessary computers or (ii) lease all the computers. Purchase option The computers cost $200,000 and will be sold for $10,000 at the end of Year 4. The CCA rate on the computers is 45%. BBI will incur pre-tax maintenance costs of $10,000 per year. These operating costs are incurred at year end. BBI can finance the entire purchase with a four-year bank term loan at a stated interest rate of 10% per year. Lease option The lease provided by the manufacturer will require payments of $50,000 per year for four years, to be paid at the beginning of each year (the first payment will be made at the same time as the lease contract is signed), while operating cash flows will occur at the end of each year. The maintenance costs are incurred by BBI. BBI has a corporate income tax rate of 35% and its cost of capital is 15%. The expected yield on Canadian treasury bills is 6%, while the expected rate of return on the S&P/TSX Composite Index is 13%. What is the net value for leasing (NVL) for BBI? a) $14,353 b) $16,730 c) $23,967 d) $27,133

Answer 1