CAPBS Inc. needs to replace its equipment and considering one with a life of five years and no salvage value after five years. The equipment costs $930,000. The firm can lease it for $245,000 a year, or it can borrow the money at 9 percent to purchase the equipment. The firm’s tax rate is 39%. The CCA rate is 20% (Class 8). Lease payments are made at the beginning of the period.

a) What is the after-tax lease payment?

b)What is the present value of the depreciation tax shield?

c) What is the net advantage to leasing for lessee?

d) What is the NAL for the lessor?

e) What is leasing paradox? How the paradox is resolved?

f) Assume your company will not pay taxes for the next five years. Now what is the net advantage to leasing?

g) Assume that the original information is true, except that the firm uses the straight-line method to depreciate the equipment to zero over its five-year life. What is the annual depreciation tax shield?

h) Using straight-line depreciation to a salvage value of zero, what is the net advantage to leasing? You can calculate present value of depreciation tax shield charging at the end of the period.

i) Assuming straight-line depreciation to a salvage value of zero, what is the break-even lease payment? (2 marks)j) What is a leveraged lease? (1 mark)k) What are the advantages of leasing?

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