Reference no: EM132927966

Problem 1: Kaskad is considering the acquisition of a new machine with an operating life of three years. The new machine could be leased for three payments of $55,000, payable annually in advance. Alternatively, the machine could be purchased for $160,000 using a bank loan at a cost of 8% per year. If the machine is purchased, Kaskad will incur maintenance costs of $8,000 per year, payable at the end of each year of operation. The machine would have a residual value of $40,000 at the end of its three-year life. Kaskad's production manager estimates that if maintenance routines were upgraded, the new machine could be operated for a period of four years with maintenance costs increasing to $12,000 per year, payable at the end of each year of operation. If operated for four years, the machine's residual value would fall to $11,000. Taxation should be ignored. Assuming that the new machine is operated for a three-year period, evaluate whether Melanie Co shoulduse leasing or borrowing as a source of finance.