Calgary Pipefitters Ltd. (CPL) is considering the purchase of a new fabricating machine for $40,000. The new machine will replace an old machine that has a book value of $10,000 but can be sold for $7,500. The new machine has an estimated life of five years, after which it would have a salvage value of $5,000. The operating cost of the new machine is estimated at $12,500 per annum. This machine will be in Class 8 (with a 20 percent CCA rate), the firm’s marginal tax rate is 30 percent, and the cost of capital is 15 percent. 

As an alternative to the new machine, CPL could overhaul the existing machine at a cost of $25,000. With this overhaul, the machine will cost $15,000 per year to operate, will last for five years, and will have zero salvage value at the end of its life. The existing machine is in Class 8 and the firm expects to always have assets in this class. 

The new machine may be leased at a cost of $12,000 per year payable in advance. The leasing company will not be responsible for any operating or maintenance costs. Alternatively, CPL can obtain a five-year loan at 10 percent from its bank to finance the new machine. Should the new machine be acquired? Why?