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Cherry Pickings Farms Inc. is considering whether to borrow funds to purchase a machine for cherry picking or lease the asset under an operating lease arrangement. The lease would be from the local leasing store with annual lease payments payable at the beginning of each of the next five years of $9.500. (Five years is the time horizon for the analysis.) As an alternative, the owner has approached his bank to enquire about a loan to purchase the cherry picking machine. The cost of the machine is $51.000, it has an economic life of 8 years and, at the end of five years, the market (salvage) value is estimated to be $20,000. The bank has informed him that they would charge 9 percent per year (payable annually, at the end of each year). The equipment has a CCA rate of 25 percent. The benefits of any tax shields are realized at the end of each year. The company's tax rate is 30 percent. Exotic Mango Farms' cost of capital is 14 percent. Complete the following table and use the space below to support your answers. Leasing alternative: Present value of the lease alternative -22830 79 Discount rate used 145 Borrow-to-purchase alternative: Present value of the borrow to purchase alternative 52024 25 Which alternative would you choose? LEASING ALTERNATIVE Why would you choose that alternative? BECAUSE IT HAS LOWER CASH OUTFLC Cherry Pickings Farms Inc. is considering whether to borrow funds to purchase a machine for cherry picking or lease the asset under an operating lease arrangement. The lease would be from the local leasing store with annual lease payments. payable at the beginning of each of the next five years of $9.500. (Five years is the time horizon for the analysis.) As an alternative, the owner has approached his bank to enquire about a loan to purchase the cherry picking machine. The cost of the machine is $51.000, it has an economic life of 8 years and, at the end of five years, the market (salvage) value is estimated to be $20,000. The bank has informed him that they would charge 9 percent per year (payable annually, at the end of each year). The equipment has a CCA rate of 25 percent. The benefits of any tax shields are realized at the end of each year. The company's tax rate is 30 percent. Exotic Mango Farms' cost of capital is 14 percent. Complete the following table and use the space below to support your answers. Leasing alternative: Present value of the lease alternative -22830 79 Discount rate used Borrow-to-purchase alternative: Present value of the borrow to purchase alternative 52024 25 Which alternative would you choose? LEASING ALTERNATIVE Why would you choose that alternative? BECAUSE IT HAS LOWER CASH OUTFLC Cherry Pickings Farms Inc. is considering whether to borrow funds to purchase a machine for cherry picking or lease the asset under an operating lease arrangement. The lease would be from the local leasing store with annual lease payments payable at the beginning of each of the next five years of $9.500. (Five years is the time horizon for the analysis.) As an alternative, the owner has approached his bank to enquire about a loan to purchase the cherry picking machine. The cost of the machine is $51.000, it has an economic life of 8 years and, at the end of five years, the market (salvage) value is estimated to be $20,000. The bank has informed him that they would charge 9 percent per year (payable annually, at the end of each year). The equipment has a CCA rate of 25 percent. The benefits of any tax shields are realized at the end of each year. The company's tax rate is 30 percent. Exotic Mango Farms' cost of capital is 14 percent. Complete the following table and use the space below to support your answers. Leasing alternative: Present value of the lease alternative -22830 79 Discount rate used 145 Borrow-to-purchase alternative: Present value of the borrow to purchase alternative 52024 25 Which alternative would you choose? LEASING ALTERNATIVE Why would you choose that alternative? BECAUSE IT HAS LOWER CASH OUTFLC Cherry Pickings Farms Inc. is considering whether to borrow funds to purchase a machine for cherry picking or lease the asset under an operating lease arrangement. The lease would be from the local leasing store with annual lease payments. payable at the beginning of each of the next five years of $9.500. (Five years is the time horizon for the analysis.) As an alternative, the owner has approached his bank to enquire about a loan to purchase the cherry picking machine. The cost of the machine is $51.000, it has an economic life of 8 years and, at the end of five years, the market (salvage) value is estimated to be $20,000. The bank has informed him that they would charge 9 percent per year (payable annually, at the end of each year). The equipment has a CCA rate of 25 percent. The benefits of any tax shields are realized at the end of each year. The company's tax rate is 30 percent. Exotic Mango Farms' cost of capital is 14 percent. Complete the following table and use the space below to support your answers. Leasing alternative: Present value of the lease alternative -22830 79 Discount rate used Borrow-to-purchase alternative: Present value of the borrow to purchase alternative 52024 25 Which alternative would you choose? LEASING ALTERNATIVE Why would you choose that alternative? BECAUSE IT HAS LOWER CASH OUTFLC

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