Your neighbour, Kelly $trome, is trying to make a decision about his growing homebased copying business. He needs to acquire colour copiers able to handle maps and other large documents. He is looking at one set of copiers that will cost $15 000 to purchase. If he purchases the equipment, he will need to buy a maintenance contract that will cost $1000 for the first year, rising by $400 per year afterward. He intends to keep the copiers for five years, and expects to salvage them for $2500. Kelly's business is located in Canada and the CCA rate for office equipment is 20% [note to instructors: substitute other appropriate tax information as desired].

Rather than buy the copiers, Kelly could lease them for $5500 per year with no maintenance fee. His business volume has varied over the past few years, and his tax rate has varied from a low of 20% to a high of 40%. Kelly's current cost of capital is 8%. Kelly has asked you for some help in deciding what to do. He wants to know whether he should lease or buy the copiers, and, moreover, he wants to know the impact of his tax rate on the decision.

Evaluate both alternatives for him for a variety of tax rates between 20% and 40% so that you can advise him confidently. What do you advise?