Question: Quality Oil Ltd. needs to acquire a state-of-the-art drilling machine which will cost the company $75,000. It is estimated that in six years time the

Quality Oil Ltd. needs to acquire a state-of-the-art drilling machine which will cost the company $75,000. It is estimated that in six years time the machine can be salvaged for $15,000. The companys bank has agreed to advance funds for the entire purchase price at 8 percent per annum payable in equal installments over the six years. Alternative, the machine could be leased over the six years from the manufacturer, by way of an operating lease with annual lease payments of $14,000. Quality Oils tax rate is 40 percent and its cost of capital is 15 percent. The drillinging machine has a CCA rate of 20 percent. If the machine is owned, annual maintenance costs will be $800.

Required: Advise Quality Oil Ltd. which alternative they should choose, providing them with calculations to support your recommendation.

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