Reference no: EM132821061

Question - Marner Manufacturing Inc. (MMI) has decided to acquire a new plasma-cutting machine for its factory. The CFO at MMI is trying to determine whether MMI should purchase the machine with borrowed funds or lease the machine for a six-year period. Leasing costs would be $35,000 per year with payments made at the beginning of each year. Maintenance costs are included in the lease payments but would be $2,400 per year if MMI purchases the machine. Insurance costs for the machine are included in the lease payments but would total $1,800 per year if MMI purchases the machine. The purchase price of the machine is $162,000. Delivery and setup costs are $12,750. The machine is a Class 8 (20%) asset and is eligible for the accelerated investment incentive rules (ACII) for capital cost allowance (CCA). If MMI decides to purchase the machine, the CCA class would continue to have assets after the machine is sold. The expected useful life of the machine is six years, and it is expected to have a salvage value of $18,000. MMI is subject to tax at a rate of 38%, and MMI can finance the purchase with a six-year term loan at an annual rate of 6%. MMI's weighted average cost of capital is 10%.

Required - Explain whether MMI should borrow funds to purchase the machine or lease the machine.