You Own a High-Tech Manufacturing Entity

question 221

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 after-tax cost of debt for the lessee?

• A) 4.67%
• B) 5.28%
• C) 7.33%
• D) 8.00%
• E) 10.72%

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Definitions:

Center

The point that is equally distant from every point on the circumference of a circle or sphere, or the middle point of a given entity or space.

Arteritis

Inflammation of the arteries that can cause them to thicken, weaken, narrow, and scar, affecting blood flow.

Artery

A blood vessel that carries oxygen-rich blood away from the heart to the body.

Inflammation

A biological response to harmful stimuli, characterized by redness, heat, swelling, and pain, as part of the body's defense mechanism.