Latin American Minerals Leasing Mining Equipment from Central Park Leasing

Question

Latin American Minerals (LAM) is trying to decide whether to lease or buy new equipment for its mining operations. The equipment costs $5,000,000 and qualifies for a 25 percent CCA rate. The equipment will have a $600,000 salvage value in 5 years. LAM’s tax rate is 40 percent, and the firm can borrow at 10.5 percent. Central Park Leasing (CPL) has offered to lease the equipment to LAM for before-tax payments of $1,250,000 per year. Assume that the lease payments are due at the start of the year and the asset pool will not close after the lease is complete.

(a) Should LAM lease or buy the equipment?

(b) What is the maximum lease payment that would be acceptable to LAM?  

(c) Suppose CPL requires LAM to pay a $350,000 security deposit at the signing of the lease. If the lease payment is still $1,250,000 a year, should LAM lease or buy the equipment?

Summary

This question belongs to finance and discusses about Latin American Minerals’ decision on whether to lease or buy new equipment for its mining operations.

Word count: Excel format