DIY Inc

Finance Aug 10, 2020

DIY Inc. is planning to purchase an equipment for $250,000 or lease it from Lessor Inc. with 6 annual lease payments (paid at the beginning of the year) of $30,500. The equipment has CCA rate of 30% and salvage value of $45,000 at the end of year 6. DIY does not have any other asset in the asset class. If DIY leases the equipment from Lessor, Lessor will also sell the equipment at the end of year 6 and its UCC is positive after the sale. The costs of debt of DIY and Lessor are 8% and 6% respectively. The tax rates for DIY is 20% and 35% for Lessor.

a) Calculate the NPV of leasing for DIY.

b) Calculate the NPV of leasing for Lessor.

c) What is the range of annual lease payments that makes leasing acceptable to both DIY and Lessor?

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