Shaw Company Ltd. Wishes to expand their manufacturing operation by acquiring a $500,000 stamping machine. The CCA rate on the machine is 50% and the machine is expected to have a 15-year life. McGuigan Machines, the manufacturer, has offered to lease the machine to Shaw Company. The sales manager of McGuigan Machine indicates to Shaw that since the leasing subsidiary of McGuigan can borrow funds at a very low rate, it is possible for them to offer Shaw an attractive lease rate to secure the machine. For the 15-year lease, the rate would be $50,000 per year, with the first payment due when the lease contract is signed.

Alternatively, Shaw cold borrow the $500,000 for 15 years at 10%; this would require annual debt repayments of $65,737. At the end of the 15 years, the machine could be sold for $20,000. The stamping machine qualifies for an investment tax credit of 10% of the cost of the asset. Shaws cost of capital is 12.6%, while their tax rate is 30%. Since the new stamping machine would result in the creation of four new jobs, Shaw has approached the provincial government regarding financial assistance for the acquisition of the stamping machine. The province has offered a cash grant of $40,000, payable when the machine is acquired, but the grant will be paid only if Shaw purchases the machine.

It has been suggested to Shaws finance manager that, since the lease rate is over $15,000 per year less than the cost of borrowing the funds required to acquire the stamping machine, Shaw should lease. What would you recommend to Shaws finance manager: should they lease or purchase the stamping machine?

To answer the question, calculate the NPV of the lease.