Pasta Spaghetti Farms has decided to purchase a new spaghetti harvesting machine. The cost of...
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Pasta Spaghetti Farms has decided to purchase a new spaghetti harvesting machine. The cost of the machine is $450,000 and it has an economic life of 10 years. At the end of 7 years, the estimated residual or salvage value is expected to be $110,000. Financing for the asset can be arranged through a 7 year commercial loan at 10 percent per year. An alternative is to lease the asset from Farmer Bills Leasing Store making annual lease payments of $77,500 per year for the next 7 years with the first payment due upon signing of the operating lease. The equipment has a CCA rate of 20 percent and the farm has a tax rate of 25 percent. Pasta Spaghetti Farms cost of capital is 16 percent. Assuming the project adds value for the owners, should the farm lease or buy the assets?
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