You Own a High-Tech Manufacturing Entity

question 182

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:

Long-Term Liabilities

Long-term liabilities are debts or obligations that are due more than one year in the future, impacting a company's long-term financial sustainability and planning.

Debt-Equity Ratio

The comparative measure of equity and debt in the financing framework for a company's assets.

Dividend Payout Ratio

The percentage of earnings paid to shareholders in dividends, used to measure the extent to which a company returns profits to its shareholders.