Q3 A company has already decided to acquire a new machine in order to make cost savings on production. It needs to decide whether to lease or buy the machine. The machine would cost 1,000,000 and the company would be able to claim tax allowable depreciation on a 25% reducing balance basis. The machine would be worthless at the end of the four year project. Alternatively, the company could enter into a four year lease for the asset with annual payments of 320,000 starting immediately. Tax is payable at 30%, one year in arrears.

a) Calculate whether the company should lease or buy the asset. The companys post-tax cost of borrowing is 10%. (18 marks)

b) Are there any other factors that should be considered when deciding whether to lease or buy an asset? Give reasons for your answer (7 marks)