Analysis of Lease and Purchase - Total Costs - Financing - Accounting Assignment Help

Assignment Details:

1. Any deposit or down payment is borrowed at a rate of 6 percent, for the term of the lease or loan. In other words, you have no free cash available at the beginning for the vehicle.
2. Any interest payment or lease payment qualifies as an expense for tax purposes. The business that requires the vehicle is profitable and can use the expense to reduce taxes. The vehicle will be used only for business purposes – no personal use.
3. Any Capital Cost Allowance (on purchases) is claimed as an expense at the maximum allowable rate for the class of the asset involved. The business that requires the vehicle is profitable and can use the expense to reduce taxes.
4. For the purpose of the assignment, the value of the vehicle should be approximately $27,000 before taxes. HST will be paid on the purchase or on the lease payments.
5. At the end of the loan or lease, the vehicle is returned to the lessor or, if purchased, is sold for an amount that matches any agreed residual value. If no residual value was agreed, and you cannot determine the assumptions used for the lease calculation, use your best estimate of the resale value at the end of the term.
6. The warranty is the same for a lease or a purchase. No maintenance is included in the deal, and maintenance expense is not part of this calculation.
7. If you base your analysis on any promotional rates, for either a lease or a loan, be sure that you use the terms from the same source at the same time when you make your comparison.

a) Calculate the total cost of the availability of the vehicle, over the period of the lease or loan, including HST but before income taxes. Do not include operational costs such as insurance, fuel, or maintenance and repairs. These costs will not depend on the lease/purchase decision.

b) Note the number of kilometers allowed in the lease agreement, and any charge for excess kilometers. Base your cost of availability on the number of kilometers that you estimate to be needed for your driving patterns. (Remember that this is a business-only vehicle.)

c) Calculate the expense deduction that will be allowable for tax purposes as a result of lease payments, taxes (HST), interest, and/or Capital Cost Allowance because of the lease or purchase.

d) Compare the total costs (before income tax) of the two methods of financing, and comment on any other differences that you discover that would influence your decision to lease or to borrow and purchase. Comment on the timing of the cash flow as well as on the total expense.

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