SED Farm Supply, a manufacturer of farm equipment, has offered your company the opportunity to lease or purchase a piece of machinery that has a useful life of 5 years. The asset sells for $60,000 and has a CCA rate of 20 percent. The machinery is expected to have a salvage value of $8,000 at the end of its useful life. At your option, SED Farm Supply will guarantee a 5-year bank loan at an interest rate of 3 percent, the best rate available, to cover the purchase price.

Alternatively, SED will lease the asset to your company for 5 years. The yearly lease payments will be $11,000, due at the beginning of each year.

Your companys cost of capital is 6% and the tax rate is 33%.

Your co-op student has already calculated the present value of the tax shield generated by the CCA claim to be $16,048. You have verified that this is correct.

a) What is the net present value of the lease option?

b) What is the net present value of the purchase option?

c) Having decided to acquire this piece of equipment, what would you recommend regarding the machinery: should it be purchased (and financed) or leased? Why?