Vinh Co is considering a project requiring a new machine. The machine cost $$2$m and it would have a

useful life of three years and residual value of $$200,000$ at the end of that time.

The machine will produce cash inflow of $$1\mathrm{.}2$m each year. Tax allowable depreciation is $25\%$ on a

reducing balance basis. Tax rate is $32\%$ and payable one year in arrears.

Vinh Co has an after$-$tax cost of capital of $15\%.$

It is considering either borrowing loan from the bank at the pre$-$tax interest rate of $14\%$ and buying the

asset outright or leasing it at a cost of $$1\mathrm{.}2$m each year for three years, with the lease payments payable

in advance at the beginning of each year.

Required

Should the project be acquired? If it should be acquired, which financing method should be used?