Question $27(25$ marks$)$

As part of its overall plant modernization and cost reduction program, the management of Tanner$-$Woods Textile Mills has decided to install a new automated weaving loom. In the capital budgeting analysis of this equipment, the IRR of the project was found to be $20$ percent versus a project required return of $12$ percent.

The loom has an invoice price of $$250,000,$ including delivery and installation charges. The funds needed could be borrowed from the bank through a $4-$year amortized loan at a $10$ percent interest rate, with payments to be made at the end of each year. In the event that the loom is purchased, the manufacturer will contract to maintain and service it for a fee of $$20,000$ per year paid at the end of each year. The loom falls in the MACRS $5-$year class and Tanner$-$Wood's marginal federal$-$plus$-$state tax rate is $40$ percent.

United Automation Inc. maker of the loom, has offered to lease the loom to Tanner$-$Woods for $$70,000$ upon delivery and installation at