Maple Leafs Sports & Entertainment is considering purchasing one of the followin
ID: 2616614 • Letter: M
Question
Maple Leafs Sports & Entertainment is considering purchasing one of the following two pieces of lighting equipment. Equipment A has a purchase price of $10 million and will cost, $240,000 pre-tax, to operate on an annual basis. This equipment will have to be replaced every 5 years and has a salvage value of $1 million. Equipment B on the other hand, has an initial cost of $14 million and costs $210,000 pre-tax, annually to operate. This equipment has a useful life of 7 years with a salvage value of $1.2 million. Both equipment sets are in an asset class with a CCA Rate of 30% and are otherwise identical. The income tax rate is 40 percent and the appropriate discount rate is 10%. Which equipment should the company purchase and why?
Explanation / Answer
For equipment A
Statement showing depreciation
Statement showing terminal cash flow
Statement showing Equivalent annual cost
For equipment B)
Statement showing depreciation
Statement showing terminal value
Statement showing Equivalent annual cost
Equipment A should be purchased as it has lower equivalent annual cost
Year Opening balance Depreciation rates Depreciation Closing balance 1 10000000 15.00% 1500000 8500000 2 8500000 30.00% 2550000 5950000 3 5950000 30.00% 1785000 4165000 4 4165000 30.00% 1249500 2915500 5 2915500 30.00% 874650 2040850