QUESTION 3 Amalgamated Pulp Limited has decided to acquire a $300 000 pulp quality control device which has a useful life of 7 years, after which no salvage value is expected. Depreciation is allowable for tax purposes at the rate of 20% of the original price The company is trying to determine whether it is better to purchase the device or to lease it The interest rate at which the company could raise a medium-term loan is 10% per annum before tax. The company tax rate is 30%. If the asset is leased, a rental of $51 000 will be payable yearly in ad vance for 7 years. Assume that tax is in the same year Should the company purchase or lease the device? (Round all discount rates to the nearest whole percentage QUESTION 4 A firm can either lease or purchase a $50 000 asset. The firm depreciates assets via straightline, and the asset under consideration has a five-year normal recovery period. The firm's tax rate is 30% and its before-tax cost of borrowing is 10%. If leased the five annual lease pay ments are payable in advance. At what lease payment(rounded to the nearest dollar) is the firm indifferent between leasing and purchasing the asset? Assume tax is in the same year QUESTION 5 Alpine limited owns the build ing and land that comprises its head office. The build ing has a remaining life of 20 years, is being depreciated by the straightline method, and has a book value of $1. 1 million. The land has a book value of $500 000. At the end of the 20 years, it is expected that the building will be demolished at a cost of $100 000 and the vacant land sold for S1 million The Lease-All Company Limited has offered to pay Allpine Ltd $1.6 million for the land and building, and grant it a 20-year lease at $200 000 per year, payable yearly in advanc Allpine would pay for maintenance, insurance and municipal rates. It would have no right or interest in the property at the expiration of the lease The taxation laws do not allow depreciation of the build ing to be claimed as a deduction, but lease payments would be deductible for Alpine Ltd. The company tax rate is expected to remain at 30% over the next 20 years and Alpine expects to earn a profit in each of those years. Its after-tax opportunity cost of funds is 8% per annum Assuming tax is payable in the same year and there is no tax on the salvage value in Year 20 should Alpine enter into the sale-and-lease back agreement with the Lease- All Company Ltd?September 2003 QUESTION 3 Amalgamated Pulp Limited has decided to acquire a $300 000 pulp quality control device which has a useful life of 7 years, after which no salvage value is expected. Depreciation is allowable for tax purposes at the rate of 20% of the original price. The company is trying to determine whether it is better to purchase the device or to lease it. The interest rate at which the company could raise a medium-term loan is 10% per annum before tax. The company tax rate is 30%. If the asset is leased, a rental of $51 000 will be payable yearly in advance for 7 years. Assume that tax is in the same year. Should the company purchase or lease the device? (Round all discount rates to the nearest whole percentage). QUESTION 4 A firm can either lease or purchase a $50 000 asset. The firm depreciates assets via straightline, and the asset under consideration has a five-year normal recovery period. The firm’s tax rate is 30% and its before-tax cost of borrowing is 10%. If leased, the five annual lease payments are payable in advance. At what lease payment (rounded to the nearest dollar) is the firm indifferent between leasing and purchasing the asset? Assume tax is in the same year. QUESTION 5 Allpine Limited owns the building and land that comprises its head office. The building has a remaining life of 20 years, is being depreciated by the straightline method, and has a book value of $1.1 million. The land has a book value of $500 000. At the end of the 20 years, it is expected that the building will be demolished at a cost of $100 000 and the vacant land sold for $1 million. The Lease-All Company Limited has offered to pay Allpine Ltd $1.6 million for the land and building, and grant it a 20-year lease at $200 000 per year, payable yearly in advance. Allpine would pay for maintenance, insurance and municipal rates. It would have no right or interest in the property at the expiration of the lease. The taxation laws do not allow depreciation of the building to be claimed as a deduction, but lease payments would be deductible for Allpine Ltd. The company tax rate is expected to remain at 30% over the next 20 years and Allpine expects to earn a profit in each of those years. Its after-tax opportunity cost of funds is 8% per annum. Assuming tax is payable in the same year and there is no tax on the salvage value in Year 20, should Allpine enter into the sale-and-lease back agreement with the Lease-All Company Ltd?