Sunnybrook Corporation Is Planning to Expand Its Operations and Acquire

question 157

Multiple Choice

Sunnybrook Corporation is planning to expand its operations and acquire new equipment at a cost of $325 460. The manufacturer of the new equipment has offered to lease it to Sunnybrook at an attractive rate. For a 10-year lease, which corresponds to the useful life of the new equipment, the annual lease payment would be $40 000 with the first payment due when the contract is signed. As an alternative, Sunnybrook could borrow the $325 460 to finance the purchase of the new equipment. If so, the borrowing rate would be 10% for a 10-year loan with annual payments of $52967. At the end of its useful life, the equipment may be sold at an estimated fair market value of $15000. The new equipment would qualify for the investment tax credit (ITC) of 10% of the purchase cost. Sunnybrook's cost of capital is 8% and their tax rate is 40%. The provincial government may give Sunnybrook a grant of $20 000 if the company goes ahead with the expansion, since it isexpected to create new jobs, but this offer has not been confirmed. The CCA rate for the type of equipment considered is 20%. Which of the following statements best describes your recommendation to Sunnybrook in this situation?

• A) Go ahead with the expansion by leasing the equipment but only if you get the government grant
• B) Go ahead with the expansion by leasing the equipment regardless of whether you get the government grant or not
• C) Go ahead with the expansion by purchasing the equipment with bank financing whether you get the government grant or not
• D) Go ahead with the expansion by purchasing the equipment with bank financing but only if you get the government grant

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Definitions:

Fl Oz

A unit of volume measurement equal to one fluid ounce, commonly used in the United States.

1/1,000,000

A mathematical fraction denoting one part per million (ppm), often used to measure concentration levels in chemistry and environmental science.

Denominator

The denominator is the bottom part of a fraction, used to calculate a part of a whole.