You Own a High-Tech Manufacturing Entity

question 156

Multiple Choice

You own a high-tech manufacturing entity. You would like to expand your operations but to do so you need to either lease or buy a $1.2 million piece of equipment for the next three years. The lease payments would be $475,000 a year for the three years. If the equipment is purchased, it will be depreciated straight-line to zero over the three-year period. The equipment will have no residual value at the end of the three years. Should the equipment be leased, the lessor and the lessee will both have marginal tax rates of 34%. The loan rate for your firm for this purpose is 8% pre-tax.

What is the amount of the annual depreciation tax shield?

• A) $136,000
• B) $166,250
• C) $158,333
• D) $272,000
• E) $400,000

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Definitions:

Social Inequality

The unequal distribution of resources, opportunities, and privileges among individuals or groups in a society.

Pastoral Societies

Are those in which people domesticate cattle, camels, pigs, goats, sheep, horses, and reindeer. Such societies first emerged about 10,000 years ago. Domesticating animals increases the food supply and makes it more dependable. This increases average settlement size and permanence, the division of labor, productivity, and inequality above the levels typical of foraging societies.

Domesticate

To adapt plants or animals from the wild for human use, modifying them for coexistence with humans.

Industrial Revolution

A period of significant industrial growth and technological innovation that began in the late 18th century, leading to major changes in manufacturing, mining, and transport.