Colbert & Sons Is Planning to Expand Their Operations and Acquire

question 82

Multiple Choice

Colbert & Sons is planning to expand their operations and acquire new equipment at a cost of $111000. The manufacturer of the new equipment has offered to lease it to Colbert at an attractive rate.For a 5-year lease, which corresponds to the useful life of the new equipment, the annual lease payment would be $18 054 with the first payment due when the contract is signed. As an alternative, Colbert could borrow the $111 000 to finance the purchase of the new equipment. If so, the borrowing rate would be 8% for a 5-year loan with annual payments of $27 801. At the end of its useful life, the equipment could be sold at an estimated fair market value of $15 000. The new equipment would qualify for the investment tax credit (ITC) of 10% of the purchase cost. Colbert's cost of capital is 7% and their tax rate is 30%. The provincial government may give Colbert a grantof $20 000 if the company goes ahead with the expansion, since it is expected to create new jobs, butthis 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 Colbert in this situation?

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

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Definitions:

Intuition

The ability to understand something instinctively, without the need for conscious reasoning.

Optimizing

Optimizing involves making the best or most effective use of a situation or resource, often by balancing different factors or constraints.

Herbert Simon

An American economist, political scientist, and cognitive psychologist known for his contributions to decision-making processes and artificial intelligence.

Satisfactory Alternatives

Acceptable options or solutions that are considered adequate for meeting a particular need or solving a problem, albeit not necessarily the best possible ones.