22 Lease or Buy Wolfson plc has decided to purchase a new machine that costs £4.2 million. The machine will be depreciated on a straight line basis and will be worth nothing at the end of four years. The corporate tax rate is 18 per cent. The Sur Bank has offered Wolfson a four-year loan for £4.2 million. The repayment schedule is four-yearly principal repayments of £1.05 million and an interest charge of 9 per cent on the outstanding balance of the loan at the beginning of each year. Both principal repayments and interest are due at the end of each year. Cal Leasing Corporation offers to lease the same machine to Wolfson. Lease payments of £1.2 million per year are due at the end of each of the four years of the lease. Should Wolfson lease the machine or buy it with bank financing?

CHALLENGE