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

question 34

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 amount of the lease-equivalent loan is closest to:

• A)$3.7 million.
• B)$3.8 million.
• C)$3.9 million.
• D)$4.0 million.

---

Definitions:

Advertising Expenditures

The amount of money spent by companies to promote their products or services through various media channels.

Market Share

Market share is the portion of a market controlled by a particular company, measured in terms of sales revenue or unit sales compared to the total market.

Kinked-demand Curve Model

An economic theory that suggests that prices in an oligopolistic market will remain stable because businesses will match price cuts but not price increases by competitors.

Oligopoly

A business environment where only a few enterprises have strong dominance in controlling market prices and the competitive landscape.