solution

The Lavish Carpet Manufacturing Co. has decided acquire a new machine that has an economic life of 10 years, with no residual value. The machine can be purchased for $75,000, and the supplier is willing to advance $45,000 of the purchase price at 12 percent. The loan is to be repaid in equal instalments over 10 years. Lavish Carpet pays 40 percent corporate income tax and can claim 20 percent capital cost allowances on the purchased asset. It expects to negotiate a further $30,000, 10-year loan with a financial institution at 14 percent interest, thereby financing any purchase entirely through debt. Meanwhile, Midland Leasing Ltd. has also offered to make the equipment available under a 10-year financial lease. Lease payments of $11,200 are to be paid at the end of each year. How should the asset be acquired?