MISKAT Co is a profitable company that plans to purchase a $320,000 machine. If bought, the annual maintenance costs of MISKAT Co will be $25,000. The machine would be used for 3 years and would be sold for $50,000 at the end of that period. The machine could alternately be obtained under a 3-year lease of $120,000 annually, payable in advance. The leasing agreement would also provide insurance and maintenance for a period of three years. There is also an annual break clause in the lease which allows the lease to be exited at the discretion of the lessee. On a 25% balance reduction basis, MISKAT Co can claim tax-admissible depreciation.

 The company pays a profit tax at an annual rate of 30% and all tax liabilities are paid in arrears for a year. The accounting year of MISKAT Co ends on December 31. Payments will be made in January of the first year of operation if the machine is purchased. In January of each year of operation, annual lease rentals are payable. 

Required:

(a) Using a 7% after-tax borrowing rate, check whether MISKAT Co should buy or lease the new equipment.

(b) Discuss whether leasing may also offer non-financial advantages. 

(c) Explain in an investment assessment the difference between risk and uncertainty.

Answer rating: 100% (QA)

a To compare the buy versus lease decision we need to calculate the net present value NPV of both options Option 1 Buy the machine Year 0 Initial outl... View the full answer