abc), an automobile dealership, has

decided to acquire a new computerized diagnostic machine for its repair facility. The

owner of abc requires advice on whether to lease the machine for a seven-

year

period or buy the machine with borrowed funds. Leasing costs would be $30,000 per

year with payments made at the beginning of each year. If PPAG buys the machine, it

will pay for maintenance costs of $3,500 per year and incur insurance costs for the

machine of $2,200

per year. Both the maintenance costs and the insurance costs are

included in the lease payments.

The purchase price of the machine is $127,500. Delivery and setup costs are $4,400.

The machine is a Class 8 asset with a capital cost allowance (CCA) rate of 20%. If

abc decides to purchase the machine, the CCA class would remain open after the

machine is sold. The expected useful life of the machine is seven years, and the

machine is expected to have a salvage value of $8,500. abc is subject to tax at a r

ate

of 25%. abc can finance a purchase with a seven-

year term loan at an annual rate of

8.75%.

Required:

Determine whether abc should lease the machine or borrow to purchase the

machine.