Reference no: EM131750573

Question: A manufacturer of farm equipment offers to lease or sell a piece of machinery that has a useful life of 5 years with no salvage value. The asset sells for $34,000 and capital cost allowances on a declining balance can be taken at a rate of 25 percent. At the option of the purchaser, the manufacturer will guarantee a 5-year, 15-percent bank loan to cover the purchase price. Alternatively, a 5-year lease would call for monthly payments of $850 due at the beginning of every month, with the corresponding tax shields available at year-end. Having decided to acquire this piece of equipment, should a farmer with a 30-percent marginal tax rate purchase or lease the asset?