Tucson Farms Ltd. needs a new lemon picking machine. The cost of the machine is $50,000, and it has an economic life of 10 years. At the end of seven years, the salvage value is estimated to be $12,000. Management is not sure if they should purchase the machine or lease it.

The manufacturer has offered to lease the machine at monthly payments of $7,500, with payments due at the beginning of each year. This would be considered an operating lease.

The companys bank has offered to lend the purchase price at 6% per year, payable in equal blended payments at the end of each year, for 7 years.

The equipment has a CCA rate of 20%. The benefits of any tax shield are realized at the end of each year. Tucsons tax rate is 30%, and their cost of capital is 8%. Should the company lease or buy the machine? Use a 7-year time-horizon for this analysis.

Your answer should include the following - Show all your calculations.

1. (1 mark) What is the present value (PV) of the lease payments?
2. (1 mark) What is the PV of the tax savings with the leasing option?
3. (1 mark) What is the PV of annual loan payments and tax savings from the loan alternative?
4. (1 mark) What is the PV of the salvage value?
5. (2 marks) What is the PV of the capital cost allowance with the loan alternative?
6. (1 mark) Should Phoenix Farms buy or lease the new machine?
7. (3 marks) Discuss 2 primary reasons why some companies may prefer to lease new equipment rather than purchase it.