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Question - Kumquat Farms Ltd. has decided to acquire a kumquat picking machine. Details on this purchase follow:
Cost of time $80,000
Expected useful life of time machine (in years) 7
Salvage value at end of useful life $12,000
Kumquat Farms has two options on how to finance the picking machine:
Option 1: A lender has agreed to advance funds for the entire purchase price with the loan being payable in equal instalments at the end of each year over the five tears. The interest rate on this loan would be 9.5%.
Option 2: The machine could be leased over its useful life from the manufacturer with equal annual lease payments payable at the beginning of each year. The annual lease payment is $16,000.
Additional information is as follows: Kumquat Farms tax rate is 33%. CCA rate for kumquat picking machine is 30%. Annual maintenance costs (if the Farm owns the machine) is $2,100.
Required - Should the machine be leased or purchased? Show all calculations.
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