Zyllane Distributors has decided to acquire a machine, which will replace an existing piece ofequipment. The company has the choice between leasing the new machine or purchasing it. Theexisting machine is currently worth $15 000, while the new machine would cost $352 652. With the new machine installed, Zyllane would reduce its costs by $44 800 a year. The new machine would have a useful life of 12 years, qualify for a 10% Investment Tax Credit (ITC) and have a salvage value after 12 years of $50 000. This type of machine qualifies for a 30% CCA rate. For a 10-year lease the annual payment is expected to be $39 566 with the first payment due upon signing the lease contract. Zyllane's cost of capital is 8%, tax rate is 40% and the cost of raising long-term debt is estimated at 9%. What is the Net Present Value of the lease? Round your final answer to the nearest dollar.
A) -$23 030
B) -$18 653
C) -$27 363
D) -$20 027

Question

Quizplus · Accepted Answer

The Net Present Value of the lease is -$23,030. This is calculated by taking the present value of the lease payments and subtracting the present value of the cash inflows. The present value of the lease payments is calculated by multiplying the annual lease payment by the present value factor for an annuity due. The present value of the cash inflows is calculated by multiplying the annual cost savings by the present value factor for a perpetuity.

Zyllane Distributors Has Decided to Acquire a Machine, Which Will