15-6. Alumco Industries must install $1 million of new computer equipment in its Ontario plant. It can obtain a bank loan for 100% of the required amount. Alternatively, Alumco believe3ns that it can arrange for a lease financing plan. Assume that these facts apply:

(1) The computer equipment falls into asset Class 45 with a declining balance CCA rate of 45%.

(2) Estimated maintenance expenses are $50,000 per year.

(3) The firm's tax rate is 34%.

(4) If the money is borrowed, the bank loan will be at a rate of 14%.

(5) The tentative lease terms call for payments of $320,000 at the beginning of each year for 3 years. (6) Under the proposed lease terms, the lessee must pay for insurance, property taxes, and maintenance.

(7) The best estimate of the market value at the end of 3 years is $200,000, but it could be much higher or lower under certain circumstances. To assist management in making the proper lease-versus-buy decision, you are asked to answer the following questions:

(a) Should the firm lease or borrow and buy the equipment? Explain.

(b) Consider the $200,000 estimated residual value. Is it appropriate to discount it at the same rate as the other cash flows? What about the other cash flowsare they all equally risky?