DogChew Products Needs to Replace Its Rawhide Tanning and Molding

question 153

Multiple Choice

DogChew Products needs to replace its rawhide tanning and molding equipment. It can be used for five years and will have no salvage value. The equipment costs $930,000. The firm can lease it for
$245,000 a year, or it can borrow the money to purchase the equipment at 9%. The firm's tax rate is
39%) The CCA rate is 20% (Class 8) .
What is the net advantage to leasing?

• A) -$88,132
• B) -$20,592
• C) $1,269
• D) $13,706
• E) $15,062

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Definitions:

Traded

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Put-Call Parity

A fundamental principle in options pricing that establishes a specific relationship between the prices of European put and call options with the same strike price and expiration date.

European Put Option

A financial contract that gives the holder the right, but not the obligation, to sell an underlying asset at a specified price on the expiration date.

Exercise Price

The price at which the holder of an option can buy (for a call option) or sell (for a put option) the underlying security.