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:

1,3-Butadiene

An elementary conjugated diene with a molecular composition of C4H6, employed in the manufacture of synthetic rubber as a monomer.

HOMO

Highest Occupied Molecular Orbital, the topmost energy level occupied by electrons in a molecule under normal conditions.

Allyl Anion

A negatively charged allyl group (a three-carbon chain with a double bond) that acts as a nucleophile in organic reactions.

LUMO

Lowest Unoccupied Molecular Orbital, which is the lowest energy molecular orbital that is currently unoccupied by electrons and can accept an electron.