Sandia Inc

question 24

Multiple Choice

Sandia Inc. wants to acquire a $360,000 computer-controlled printing press. If owned, the press would be depreciated on a straight-line basis over 10 years to a book salvage value of $0. The actual cash salvage value is expected to be $25,000 at the end of 10 years. If purchased, Sandia will incur annual maintenance expenses of $3,000. These expenses would not be incurred if the press is leased. If the press is purchased, Sandia could borrow the needed funds at an annual pre-tax interest rate of 10%. The lease rate would be $48,000 per year, payable at the beginning of each year. If Sandia has an after-tax cost of capital of 12% and a marginal tax rate of 40%, what is the net advantage to leasing?

• A) $60,713
• B) $65,543
• C) $57,173
• D) $37,737

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Definitions:

Sales Volume

The total number of units of product sold during a specific period.

Variable Costing

A costing method that includes only variable costs—direct materials, direct labor, and variable manufacturing overhead—in the cost of a product.

Fixed Manufacturing Overhead

Costs that do not vary with the level of production or sales, such as rent, salaries of permanent staff, and equipment depreciation.

Product Cost

The total cost associated with producing goods, including raw materials, labor, and overhead costs.