CT All Ltd., a manufacturer of customized baseball souvenirs, is negotiating with the Grand Slam Company to purchase or to lease a machine that produces foam cushions for seating at baseball parks. The machine would cost $250,000. In five years the machine would have an estimated salvage value of $40,000. Its useful economic life is nine years. Under an operating lease, payments would amount to $64,645. As an alternative, CT All can borrow funds at 13 1/3 percent from its nearby bank. These machines have a CCA rate of 20%.
CT All and has a tax rate of 25%. The capital cost rate on this machine is 9% and CT All's cost of capital is 15%. Lease payments would be at the beginning of each year, and tax savings would occur at the end of each year.
Should CT All lease or borrow to purchase the machine?