a) Embo Manufacturing, a leading manufacturer has devised to acquire a new machine to increase its production capacity. Embo has two options to finance the acquisition, which is either to lease the new machine or purchase it outright using the proceeds from a bank term loan. The purchase price of the machine is $80,000.

Lease: Embo could lease the machine for 4 years for a lease payment of $25,000 per annum, payable at the beginning of each year. Under this option, the lessor will bear maintenance and insurance costs. Embo intends to exercise the option to purchase the machine for $5,000 at the end of the lease period.

Purchase: Embo could obtain a 4-year amortized loan at a before-tax cost of borrowing of 12% per annum to purchase the machine. A maintenance contract on the machine would cost $4,000 per year payable after services have been rendered. Annual insurance premium is $2,000 on cash-before-cover basis. The machine falls into the MACRS-3-year asset class and Embo will continue using the machine beyond year 4. The depreciation rates are as follows:

YEAR 1	YEAR 2	YEAR 3	YEAR 3
33%	45%	15%	7%

Embos corporate tax rate is 25%

What is the net advantage to leasing?, which option should Embo select, lease financing or purchase outright via bank borrowing?

a.

$28,126.95 Decision: KSAI should lease option because its NPV is higher

b.

$8,323.69 Decision: KSAI should lease option because its NPV is higher

c.

$69,753.90 Decision: KSAI should lease option because its NPV is higher

d.

$78,077.59 Decision: KSAI should lease option because its NPV is higher