RPC Creative Works is evaluating a potential lease agreement for a printing machine that costs $100,000.00. This machine would be able to reduce production cost in printing of buntings and other outdoor promotional items by 25%.

The leasing proposal calls for four annual payments of $30,000.00 to be made at the beginning of the year. The lessor will assume all costs pertaining to maintenance and insurance should RPC opt for the leasing arrangement. RPC intends to exercise the option to purchase the asset at the end of lease contract for $5.000.00.

RPC is also considering purchasing the machine by utilizing the standby credit facility made available to them by their banker, should the company decide to buy the asset rather than lease it. For machinery purchase, RPCs banker is offering a 4-year term loan financing at 10% interest on a yearly reducing balance. Instalment payments are to be made annually.

If RPC buys the machine, it will have to purchase a maintenance contract that costs $5,000.00 a year, payable at the end of each year, with the machine supplier.

RPC would also have to purchase an insurance policy for the new machine. Its insurance broker provided the following information on the insurance coverage:

Annual premium is based on the rate of 2% of the insured value.

Annual premium is to be paid at the beginning of the year.

For determining the insured value, the market value of the machine is assumed to be the insured value. Best estimates for the machine market value, obtained from RPC panel of registered valuer are given below:

Year 2 =$75,000; Year 3 =$50,000; Year 4 =$20,000

The initial premium amount is based on the cost of the machine at time of purchase

This machine falls into the MACRS 3-year class, with its applicable MACRS depreciation rates of 33%, 45%, 15% and 7%. The applicable tax rate is 30 percent.

Should RPC lease or buy? Explain.