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:

Reference Group

A group that individuals use as a standard for evaluating themselves and their own behavior, often influencing their beliefs, attitudes, and actions.

Power Distance

A cultural dimension that describes the extent to which less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally.

Social Status

The level of respect, admiration, and importance an individual holds within a society based on various factors including occupation, wealth, and education.

Authority

The legitimate power or right to give orders, make decisions, and enforce obedience.