Question: Question 21 (12 points) Problem 3 (12 Marks) ABCO Manufacturing Ltd. has decided to acquire a new piece of processing machinery in order to improve

Question 21 (12 points) Problem 3 (12 Marks) ABCO Manufacturing Ltd. has decided to acquire a new piece of processing machinery in order to improve production. The company does not know whether it should purchase or lease the machinery. The initial cost of the machinery is $750,000. Its expected useful life is 7 years, at which point the machine will have a salvage value of $100,000. The machinery falls into asset class 8, which has a CCA rate of 20% and ABC's tax rate is 35%. Annual operating costs to run the machine are estimated to be $80,000, including $15,000 per year in maintenance costs (assume end of year cash flows). If ABCO leases this asset, the lessor will pay for the maintenance costs. ABCO's before-tax cost of borrowing is 10% and its weighted average cost of capital (WACC) is 15%. The proposed annual lease payments in advance are $135,000 for 7 years. Required: a. Determine if ABCO Manufacturing should lease or purchase the machine. (10 marks)

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