Use the Following Information to Answer the Question(s)below

question 6

Multiple Choice

Use the following information to answer the question(s) below.
Assume that it is 2012 and Rearden Metal is considering the purchase of a new blast furnace costing a total of $5 million.This furnace will qualify for accelerated depreciation: 20% can be expensed immediately,followed by 32%,19.2%,11.52%,11.52% and 5.76% over the next five years.However,because of Rearden's substantial tax loss carryforwards,Rearden estimates its marginal tax rate to be only 10% over the next five years.Since Rearden will get very little tax benefit from the depreciation expense,they consider leasing the furnace instead.Suppose that Rearden and the lessor face the same 8% borrowing rate,but the lessor has a 40% marginal tax rate.Assume that the furnace is worthless after five years,the lease term is five years,and a lease would qualify as a true tax lease.
-Assuming that Rearden's annual lease payments are $1.1 million,then the effective after-tax lease borrowing rate is closest to:

• A)8.0%.
• B)12.8%.
• C)15.4%.
• D)4.55%.

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Definitions:

Ovary

A female reproductive organ in which ova or eggs are produced, present in humans and other vertebrates as a pair.

Stamen

The stamen is the male reproductive part of a flower composed of the anther and filament, responsible for producing pollen.

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Substances that easily vaporize at normal temperatures and pressures, often having strong odors.

Herbivory

The act of eating plants or plant parts by animals, which can significantly influence plant population and community structure.