LEASE VS. BORROW TO PURCHASE (9 MARKS)

The Aromatic Bean Company is considering whether to lease its equipment as an alternative to borrowing to purchase it. The equipment will cost $175,000. This amount can be borrowed from a local bank at 9% interest with annual payments amortized over 5 years. Payments would be at the end of the year. and the expected salvage at the end of 5 years is $60,000.

Alternatively, lease payments of $65,000 could be made each year for 5 years, with the first payment due immediately.

If the equipment is purchased there will be an annual maintenance cost of $12,000 to ensure the equipment is running at optimal levels.

Aromatic's cost of capital is 14%, and its tax rate is 27%.

The CCA rate on this equipment would be 25%,

Required:

Should the Aromatic Bean Company lease or borrow to purchase? Show calculations to support your work.