Ajax Is Considering Leasing a $900,000 Equipment

question 15

Essay

Ajax is considering leasing a $900,000 equipment.Five annual payments of $190,000 are due in advance.Ajax's required rate of return is 12% and has a 35% tax rate.The asset is in the 25% CCA class.The half year rule applies and CCA is taken in year 0.After the fifth year, the asset becomes worthless.Determine the NPV of the lease.
$$\begin{array}{l}\begin{array} { | l | r | } \hline \text { DATA: }\\\hline \text { Equipment value } & 900,000 \\\hline \text { Lease payments } & 190,000 \\\hline \text { Number of lease payments } & 5 \\\hline \text { Tax rate } & 35 \% \\\hline \text { CCA rate } & 25 \% \\\hline \text { Rate of interest } & 12.00 \% \\\hline \text { After tax rate of interest } & 7.80 \% \\\hline\end{array}\end{array}$$

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Definitions:

Consumer Packaged Goods

Products that are sold in packaged form to consumers, typically involving items that are consumed daily and purchased frequently.

Push And Pull Systems

Supply chain strategies where "push" involves production based on forecasted demand and "pull" relies on actual demand signals for production.

Inventory Management System

A technology-based approach that tracks inventory levels, orders, sales, and deliveries to ensure that the right product is available at the right time.