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Alpha Ltd. has decided to acquire a new piece of machinery in order to improve production. The company does not know whether it should purchase

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Alpha Ltd. has decided to acquire a new piece of machinery in order to improve production. The company does not know whether it should purchase or lease the machinery. The initial cost of the machinery is $750,000. The contract call for yearly lease payments of $110,000 for seven years. After seven years, the machine will have a residual value of $100,000. The machinery falls qualifies for a CCA rate of 20% and Alpha's tax rate is 31%. Annual operating costs to run the machine are estimated to be $80,000, including $15,000 per year in maintenance costs (assume end of year cash flows). If Alpha leases this asset, the lessor will pay for the maintenance costs. Alpha's before-tax cost of borrowing is 10% and its weighted average cost of capital is 15%. The proposed annual lease payments in advance are $135,000 for seven years. Hint for PVCCA tax shield: [TdC/(K+d)]*[(1+0.5K)/(1+K)]- [(1/(1+K)^n] (TRV/(k+d)] ha Should Alpha lease or purchase the machine Show your work. (10 Marks) Alpha Ltd. has decided to acquire a new piece of machinery in order to improve production. The company does not know whether it should purchase or lease the machinery. The initial cost of the machinery is $750,000. The contract call for yearly lease payments of $110,000 for seven years. After seven years, the machine will have a residual value of $100,000. The machinery falls qualifies for a CCA rate of 20% and Alpha's tax rate is 31%. Annual operating costs to run the machine are estimated to be $80,000, including $15,000 per year in maintenance costs (assume end of year cash flows). If Alpha leases this asset, the lessor will pay for the maintenance costs. Alpha's before-tax cost of borrowing is 10% and its weighted average cost of capital is 15%. The proposed annual lease payments in advance are $135,000 for seven years. Hint for PVCCA tax shield: [TdC/(K+d)]*[(1+0.5K)/(1+K)]- [(1/(1+K)^n] (TRV/(k+d)] ha Should Alpha lease or purchase the machine Show your work. (10 Marks)

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