You Own a High-Tech Manufacturing Entity

question 174

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 present value of the depreciation tax shield?

• A) $28,750
• B) $56,250
• C) $68,518
• D) $95,456
• E) $107,359

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Definitions:

Malignant Cells

Abnormal cells that divide uncontrollably and have the potential to invade other tissues, leading to cancer.

Neoplasm

An abnormal growth of tissue, which can be benign or malignant, resulting from uncontrolled cell division.

Oncogene

A gene that has the potential to cause cancer by transforming a normal cell into a tumor cell when mutated or expressed at high levels.

Telomeres

Protective caps at the ends of chromosomes that prevent the loss of genetic information during cell division and play a role in aging and cancer.