You Own a High-Tech Manufacturing Entity

question 62

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 net advantage from leasing from the lessor's point of view?

• A) -$148,500
• B) -$62,548
• C) -$17,706
• D) $17,706
• E) $62,548

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Definitions:

Existing Levels

The current state or condition of something, often used to describe the intensity, amount, or degree of an element or entity.

Nonattainment Areas

Geographic areas that have not met the national primary or secondary ambient air quality standards for certain pollutants as designated by the Environmental Protection Agency (EPA).

National Ambient Air Quality Standards

Standards set by the Environmental Protection Agency (EPA) for the quality of outdoor air in the United States to protect public health and the environment.

Injunction

A court order either forcing a party to do something or prohibiting a party from doing something.