Lease versus Buy Alumco Industries must install $1 million of new computer equipment in its Ontario plant. It can obtain a bank loan for 100% of the required amount. Alternatively, Alumco believes that it can arrange for a lease financing plan. Assume that these facts apply: -1 The computer equipment falls into asset Class 45 with a declining balance CCA rate of 45%. -2 Estimated maintenance expenses are $50,000 per year. -3 The firm's tax rate is 34%. -4 If the money is borrowed, the bank loan will be at a rate of 14%. -5 The tentative lease terms call for payments of $320,000 at the beginning of each year for 3 years. -6 Under the proposed lease terms, the lessee must pay for insurance, property taxes, and maintenance. -7 The best estimate of the market value at the end of 3 years is $200,000, but it could be much higher or lower under certain circumstances. To assist management in making the proper lease-versus-buy decision, you are asked to answer the following questions: 1. Should the firm lease or borrow and buy the equipment? Explain. 2. Consider the $200,000 estimated residual value. Is it appropriate to discount it at the same rate as the other cash flows? What about the other cash flows-are they all equally risky