Question 1

Your family owns a chicken farm. You are in the business of raising chickens for sale to a national grocery store chain. You would like to obtain a new revolving poultry thigh deboner. To buy one would cost $350,000. It would fall in an asset class with an allowable 20% depreciation rate for CCA purposes. There are many other assets in this class. You would keep the deboner for 10 years before it would become obsolete and be worthless.

Instead of buying the deboner, you could lease it. A 10-year lease would involve lease payments of $45,000 per year (due at the beginning of each year).

Your tax rate is 40%. Your farm is financed with 50% debt (from the bank) and 50% equity (your personal investment). Generally, you require a return of 25% on your personal investment to make projects worthwhile. The before-tax cost of debt is 9%.

1. Should you buy or lease the deboner?
2. At what lease payment would you be indifferent between buying or leasing the machine?