Question: A firm plans to either purchase or lease a machine
A firm plans to either purchase or lease a machine that costs $250,000 and is subject to a 20-percent CCA rate, using the declining balance method. The required lease payments are $30,000 at the beginning of each of four years. The lessor has agreed to provide maintenance as part of the lease contract, and the firm has estimated it would incur $20,000 per year in maintenance expense if it decided to purchase the machine. It estimates the asset could be sold for $115,200 after four years (the ending UCC at the end of year 4). The firm’s before-tax borrowing rate is 8 percent, and its effective tax rate is 40 percent. Should it purchase or lease the machine, assuming the acquisition of the machine has a positive NPV and that the lease would qualify as an operating lease?
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