Curtis Corporation Started Operations on March I,2009

question 37

Essay

Curtis Corporation started operations on March I,2009.It needs to acquire a special piece of equipment for its manufacturing operations.It is evaluating two options as follows.
Option 1: Lease the equipment for 5 years.Lease payments would be $11,000 per year,due at the beginning of each fiscal year (March I).Curtis's incremental borrowing rate is 5%.There is no bargain purchase or renewal option.Curtis is responsible for all executory costs of operating the equipment.
Option 2: Purchase the equipment for $58,000 by borrowing the full purchase amount at 5% over 5 years.This price is considered the fair value of the equipment.Payments are due at the end of each fiscal year (February 28).
The equipment has a useful life of 5 years and would be depreciated on a straight-line basis.No residual value is expected to exist at the end of 5 years.
Requirements:
a.Calculate the present value of the lease payments (Option 1).
b.Calculate the payment that would be required under the purchase option (Option 2).
c.Calculate and briefly discuss the financial impact of each option on the non-current assets,total liabilities,and net income of Curtis for the first year of operations.Assume all payments were made when due.Show your calculations.

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Definitions:

Common Resources

Goods that are non-excludable and rival in consumption, such as fisheries, the atmosphere, or public parks.

Enjoyment

The state or experience of taking pleasure or satisfaction from something.

Willingness to Pay

The maximum amount an individual is prepared to spend on a good or service, reflecting the value they derive from it.

Surplus

An excess of production or supply over demand, often leading to lower prices.