Ready Soft Drink Co. has decided to acquire a bottling machine for its existing plant. The cost of the machine is $450,000. In five years the machine is expected to have a salvage value of $150,000. The Royal Bank has agreed to advance funds for the entire purchase price at 8 percent per annum payable in equal instalments at the end of each year over the five years.

As an alternative, the machine could be leased over the five years from the manufacturer, Metalworks Ltd., with annual lease payments of $100,000 payable at the beginning of each year.

Ready's tax rate is 40 percent. Its cost of capital is 15 percent, and its tax shields are realized at the end of the year. Bottling machines have a CCA rate of 20 percent. If the machine is owned, annual maintenance costs will be $5,000.

Required:

Should Ready Soft Drink lease or buy its machine? Show all calculations.

Answer rating: 100% (QA)

Solution Lease indicates an agreement among lessee an... View the full answer