Assume the year is 2017. TrigCo is considering leasing a new equipment that it requires, for $155,000 a year, payable at the beginning of the years. The cost of the new equipment is $900,000, has a CCA rate of 25% and will last for 6years. The expected scrap value is $150,000. Assume that the first CCA tax deduction would be at the end of the first year. TrigCo has lots of other assets in the asset pool. The tax rate is 30% and the cost of debt is 7%. In 2017, the half year rule is applicable to this equipment.
a) What should be the appropriate discount rate for analysing this lease? Justify.
b) List the relevant cash flows from lessee's point of view and state when they occur and what type (inflow/outflow) they are.
c) Calculate the PVs of all but the initial cash savings.
d) Calculate the NAL from lessee's point of view and whether leasing is financially feasible.
e) What would be the indifferent pre-tax lease payment for the lessee?
f) What would be the NAL for lessor (state this without any calculation) if lessor has the same tax rate and borrowing cost? Why?
g) What is meant by "Leasing Paradox"? How is it resolved in real world?