Reference no: EM131750552

Question: The Lavish Carpet Manufacturing Co. has decided to acquire a new machine that has an economic life of 10 years, with no residual value. The machine can be purchased for $85,000, and the supplier is willing to advance $60,000 of the purchase price at 14 percent. The loan is to be repaid in equal installments 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 $25,000, 10-year loan with a financial institution at 16-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 $12,600 are to be paid at the end of each year. How should the asset be acquired?