Jet To GO wants to lease production equipment from ABC Co. …
Jet To GO wants to lease production equipment from ABC Co. The payments are $200,000 per year for 5 years payable at the beginning of each year. Encore won’t have to worry about annual maintenance costs if the equipment is leased; ABC Co. has agreed to service the equipment at no additional charge. As an alternative, the bank offered to lend Jet To GO a loan of $950,000 to purchase the equipment. The loan would be paid in equal instalments at the end of each year for 5 years at an annual interest rate of 11%. At the end of 5 years, the equipment could be sold for an estimated $250,000. However, Jet To GO would have to pay for annual maintenance fee of the machine estimated at $14,000 per year. Jet To GO’s cost of capital is 13% and the tax rate is 40%. The equipment belongs to a CCA class with a rate of 25%. Required: Should Jet To GO lease or borrow to purchase the equipment? Show calculations to support your answer. Access Excel Here.