You Own a High-Tech Manufacturing Entity

question 246

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 break-even lease payment amount?

• A) $34,313
• B) $32,068
• C) $43,063
• D) $49,150
• E) $52,789

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Definitions:

Trespasser

An individual who enters or uses another's property without permission, potentially facing legal action for unauthorized intrusion.

Physical Causation

A concept in law and philosophy that denotes the actual cause-and-effect relationship between actions or events.

Remoteness Test

Determining whether the damages were too far removed from the original negligent act; a breaching party is only responsible for reasonably expected losses.

Misfeasance

Wrongful conduct.