It is time for the renewal of existing photocopying equipment at Runt Ltd. New equipment will cost $95,000 and this amount can be borrowed from the local bank at 7 percent interest with annual payments at the end of the year. The CCA rate on the equipment would be 20 percent. The equipment will be salvaged in 5 years for $24,000. The current equipment is worth $12,500. Runt could also lease the equipment with annual lease payments of $20,000 payable at the beginning of each year, which would avoid the annual maintenance expense of $1,250 involved if they purchase the equipment. Cost of capital is 14 percent. The tax rate is 40 percent.
Should Runt Ltd. lease or borrow to purchase the photocopying equipment?
n = 5 T = 40% k = 15% d = 20
Discount rate (r or i) = 7% (1 -.40) = 4.2%
