You Own a High-Tech Manufacturing Entity

question 82

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 amount would the lease payment have to be for both the lessor and the lessee to be indifferent to the lease?

• A) $306,965
• B) $318,035
• C) $414,141
• D) $441,772
• E) $465,098

Understand the risks associated with global interconnectedness and the role of companies in managing those risks.

Comprehend the concept of product quality management and approaches to achieve quality.

Assess the financial impact of adhering to environmental standards on multinational corporations.

Recognize the role and impact of social networking on businesses.

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Definitions:

Fair Value

An estimate of the price at which an asset or liability could be exchanged between knowledgeable, willing parties in an arm's length transaction.

Consolidated Net Income

The total earnings of a corporation and its subsidiaries after tax, representing the total profit attributable to the parent company and its shareholders.

Acquisition

The process by which one company takes over another company, either by purchasing it or merging with it.

Amortization

The process of gradually writing off the initial cost of an asset over a period.