Should the farm lease or buy the assets

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Problem 1: Pasta Spaghetti Farms has decided to purchase a new spaghetti harvesting machine. The cost of the machine is $450,000 and it has an economic life of 10 years. At the end of 7 years, the estimated residual or salvage value is expected to be $110,000. Financing for the asset can be arranged through a 7 year commercial loan at 10 percent per year. An alternative is to lease the asset from Farmer Bill's Leasing Store making annual lease payments of $77,500 per year for the next 7 years with the first payment due upon signing of the operating lease. The equipment has a CCA rate of 20 percent and the farm has a tax rate of 25 percent. Pasta Spaghetti Farms cost of capital is 16 percent. Assuming the project adds value for the owners, should the farm lease or buy the assets?

Reference no: EM132965223

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