Larrys Locksmith Ltd (LLL) has recently decided to start making an improved lock that requires special new equipment. The cost of the new equipment is $1,200,000 and is estimated to have a salvage value of $100,000 in five years. The CCA rate for the new equipment is 35% and they will have other assets in this class for at least the next ten years. LLL can borrow from the bank at 8% and their current WACC is 13%. They have been offered to lease the new equipment for annual lease payments of $300,000, made at the beginning of each year for five years. LLLs marginal tax rate is 20%. This new equipment requires special insurance of $5,000 per year paid at the beginning of the year. The lease payments do not include the insurance.

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Should LLL buy or lease the new equipment?

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