Megapharm Limited Wants to Expand Their Operations and Acquire New

Multiple Choice

Megapharm Limited wants to expand their operations and acquire new equipment at a cost of $235000. The manufacturer of the new equipment has offered Megapharm a 10-year lease, whichcorresponds to the useful life of the new equipment. The annual lease payment would be $22 558 with the first payment due when the contract is signed. As an alternative, Megapharm could borrow the $235 000 to finance the purchase of the new equipment. The borrowing rate would be11% for a 10-year loan with annual payments of $39 903. At the end of its useful life, the equipment could be sold at an estimated fair market value of $12 000. The new equipment would qualify forthe investment tax credit (ITC) of 10% of the purchase cost. Megapharm's cost of capital is 12% andtheir tax rate is 30%. The provincial government may give Megapharm a grant of $35 000 if the company goes ahead with the expansion, since it is expected to create new jobs, but this offer hasnot been confirmed. The CCA rate for the type of equipment considered is 30%. Which of the following statements best describes your recommendation to Megapharm in this situation?

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