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:

Loaded Question

A question that contains a controversial or unjustified assumption, making it difficult to answer without bias.

Begging the Question

Begging the question is a logical fallacy where the conclusion of an argument is assumed in one of its premises, essentially arguing in a circle without providing proof.

Independent Premises

Arguments or statements that support a conclusion but do not rely on each other to do so.

Fallacy of Division

This logical fallacy assumes that what is true of a whole must also be true of its parts. For example, assuming that because a car is heavy, each part of the car must also be heavy.