Simpson Is Considering Leasing a $500,000 Equipment

question 101

Essay

Simpson is considering leasing a $500,000 equipment.Four annual payments of $150,000 are required at the end of each year.Simpson's required rate of return is 6% and has a 40% tax rate.The asset is in the 25% CCA class.The half year rule applies and CCA is taken in year 0.After the fourth year, the asset becomes worthless.Determine the NPV of the lease.
$$\begin{array}{l}\begin{array} { | l | r | } \hline \text { DATA: }\\\hline \text { Equipment value } & 500,000 \\\hline \text { Lease payments } & 150,000 \\\hline \text { Number of lease payments } & 4 \\\hline \text { Tax rate } & 40 \% \\\hline \text { CCA rate } & 25 \% \\\hline \text { Rate of interest } & 6.00 \% \\\hline \text { After tax rate of interest } & 3.60 \% \\\hline\end{array}\end{array}$$

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Definitions:

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