You Own a High-Tech Manufacturing Entity

question 5

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 to leasing amount from the perspective of the lessee?

• A) -$148,500
• B) -$62,548
• C) -$17,706
• D) $17,706
• E) $62,548

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Definitions:

Embryos

Early developmental stages of organisms following fertilization, before they reach the fetal stage.

Cross-Sectional Design

A study approach that examines information from an entire population or a representative sample at a particular moment.

Chromosomes

Thread-like structures located inside the nucleus of animal and plant cells, made of protein and a single molecule of DNA, and responsible for carrying genetic information.

Genes

The segments of DNA that are located on the chromosomes and are the basic units for the transmission of all hereditary traits.