Problem
Pure Limestone Ltd. needs to acquire a piece of mining equipment which will cost the company $70,000. It is estimated that in 10 years' time the machine can be salvaged for $7,000.
The company's bank has agreed to advance funds for the entire purchase price at 8 percent per annum payable in equal installments at the end of each year over the 10 years.
Alternative, the machine could be leased over the 10 years from the manufacturer, by way of an operating lease with annual lease payments of $8,500.
The company's tax rate is 40 percent, and its cost of capital is 12 percent. The equipment has a CCA rate of 30 percent.
If the machine is owned, annual maintenance costs will be $800.
Task
Advise the company which alternative they should choose, providing them with calculations to support your recommendation.