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After calculating a positive NPV, Renew Inc. has decided to undertake a four-year project to manufacture guardrails from recycled plastic. The project requires a $250,000 machine that will be amortized over four years on a straight-line basis for accounting purposes to an estimated salvage value of $25,000 at the end of the project. Renew is now trying to decide whether to lease the machine or to purchase it.
Additional information used in the NPV calculation is as follows. The project will require an additional investment in inventory of $50,000 and is expected to generate net (before-tax) operating cash flows of $100,000 per year over the life of the project. Employee training costs for the new machine are estimated to be $40,000. These training costs will be expensed in the current period for both tax and accounting purposes. Renew's tax rate is 31%, its weighted average cost of capital is 12%, and the applicable CCA rate on the machine is 15%.
If Renew decides to lease the machine, it will have to make annual lease payments of $50,000 per year at the beginning of the year.
Determine whether Renew should lease or purchase the machine if its before-tax cost of borrowing is 9%.
Briefly describe motivations for leasing
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