Question

Question 1: Silver Bullet Train is planning to acquire a new Engine. The current market value of the Engine
is $210,000, and the engine can be used for 8 years. They have two options.
Option A: They can lease the engine from Sky Motors Inc. who has agreed to lease the engine for
8 years at an annual lease payment of $38,000 (the first payment has to be made at the beginning
of the period)
Option B: They can get an 8-year, 12% interest loan of $210,000 from Nordic bank. The loan is to
be paid-off in eight equal annual instalments (Payments will be made at the end of each year).​

Answer 1

Answer:

1 . Silver Bullet Train is planning to acquire a new Engine. The current market value of the Engine

is $210,000, and the engine can be used for 8 years. They have two options.

Explanation:

Option A: They can lease the engine from Sky Motors Inc. who has agreed to lease the engine for

8 years at an annual lease payment of $38,000 (the first payment has to be made at the beginning

of the period)

Option B: They can get an 8-year, 12% interest loan of $210,000 from Nordic bank. The loan is to

be paid-off in eight equal annual instalments (Payments will be made at the end of each year).

The useful life of the asset for tax purpose is 6 years. The company follows a straight-line depreciation

method. The engine has a residual value of $20,000. If the company pays 40% tax, which option should

the company choose?