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:

Project Life Cycle

The series of phases that a project goes through from its initiation to its closure, including planning, execution, monitoring, and completion.

Understanding

The ability to comprehend or grasp the meaning, nature, or importance of something.

Resources

Assets, materials, or inputs utilized in the production process or to accomplish a task.

Conceptual Schedules

Plans or timetables at the conceptual or planning stage, outlining anticipated tasks and milestones without detailed specifics.