British Columbia Manufacturing (BCM) Limited Is Planning to Expand Their

Multiple Choice

British Columbia Manufacturing (BCM) Limited is planning to expand their operations and acquire new equipment at a cost of $68 000. The manufacturer of the new equipment has offered to lease it to BCM at an attractive rate. For a 7-year lease, which corresponds to the useful life of the new equipment, the annual lease payment would be $10 186 with the first payment due when the contract is signed. As an alternative, BCM could borrow the $68 000 to finance the purchase of the new equipment. If so, the borrowing rate would be 10% for a 7-year loan with annual payments of$13 968. At the end of its useful life, the equipment could be sold at an estimated fair market valueof $5 000. The new equipment would qualify for the investment tax credit (ITC) of 10% of the purchase cost. BCM's cost of capital is 8% and their tax rate is 35%. The provincial government may give BCM a grant of $10 000 if the company goes ahead with the expansion, since it is expected tocreate new jobs, but this offer has not been confirmed. The CCA rate for the type of equipment considered is 20%. Which of the following statements best describes your recommendation to BCM in this situation?

A) Go ahead with the expansion by purchasing the equipment with bank financing whether you get the government grant or not
B) Go ahead with the expansion by leasing the equipment but only if you get the government grant
C) Go ahead with the expansion by leasing the equipment regardless of whether you get the government grant or not
D) Go ahead with the expansion by purchasing the equipment with bank financing but only if you get the government grant