The firm for which you work requires the use of a particular type of machine. To purchase the

machine would cost $$24,000$ plus $$1,000$ to install it$.$ The machine falls in an asset class with

a CCA rate of $20$ percent. The machine would be sold in six years and the firm estimates that

it would be able to get $$5,000$ for it at that time. Instead of buying the machine, the firm also

has the opportunity to lease it $($the lessor would provide the machine and also cover the

installation cost$).$ The firm could sign a six$-$year lease in which the first lease payment would

be $$5,000$ due immediately. A clause in the lease contract states that future yearly payments

will increase at the rate of inflation $($payments to be rounded to the nearest dollar$).$ Inflation is

expected to be $2\%$ a year for the foreseeable future and the firm$$s tax rate is $40$ percent. The

company$$s cost of borrowing is $10$ percent and its WACC is $14$ percent.

$($a$)$ Should the firm lease or buy the machine? Show your calculations. Round all dollar

amounts to the nearest dollar.

$($b$)$ Ignore your answer to $($a$)$ and assume that, your answer to $($a$)$ is that there is a net

advantage to leasing $($based on the salvage value above$)$ of $$4,000($which is not the

correct number$).$ Calculate the salvage value that would make you prefer buying.