In 2021, Vale do Rio Doce Ltd. had a financial crisis which forced them to make drastic decisions to reduce their operating costs. Vale owned a machine which was important for generating income. However, BHP Billiton could not find a similar machine on the market. Due to their strong relationship, Vale do Rio Doce Ltd. decided to lease their machine to BHP Billiton. On 30 June 2022, BHP Billiton Ltd. leased the machine from Vale do Rio Doce Ltd. The finance lease agreement contained the following provisions:

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The lease is cancellable, but only with the permission from the lessor. Included in the annual rental payment is an amount of $1,340 to cover the costs of maintenance and insurance paid for by the lessor. BHP Billiton Ltd. intends to return the machine to the Vale do Rio Doce Ltd.

Required:

Assume that during this lease agreement, Vale do Rio Doce Ltd. has reduced profit by $150,000. Critically evaluate whether the decision to lease this machine was good for Vale do Rio Doce Ltd. In your evaluation, consider the meaning of the strong relationship and the impact on financial and non-financial users.

4 years $43,400 5 years Lease term Annual rental payment, in advance on 30 June each year (starting at 30/06/2022) Estimated useful life of asset Estimated residual value of machine at end of lease term Residual value guarantee by lessee Interest rate implicit in the lease $12,000 $9,000 9%