a. After calculating an NPV of $11,911, Renew Inc. has decided to undertake a three-year project to manufacture guardrails from recycled plastic. The project requires a $150,000 machine that will be amortized over three years on a straight-line basis for accounting purposes to an estimated salvage value of $25,000 at the end of the project. Renew is now trying to decide whether to lease the machine or to purchase it.
Additional information used in the NPV calculation is as follows. The project will require an additional investment in inventory of $20,000 and is expected to generate net (before-tax) operating cash flows of $80,000, $90,000, and $100,000 in years 1 through 3, respectively.
Renew's tax rate is 36%, its weighted average cost of capital is 21%, and the applicable CCA rate on the machine is 20%.
If Renew decides to lease the machine, it will have to make annual lease payments of $40,000 per year at the beginning of the year.
Determine whether Renew should lease or purchase the machine if its before-tax cost of borrowing is 8%. (9 marks)
b. Briefly describe three motivations for leasing.