You Own a High-Tech Manufacturing Entity

question 78

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:

Readiness

The state of being fully prepared and willing to engage in a particular task, activity, or learning process.

Cognitive Ability

The capacity to perform higher mental processes of reasoning, remembering, understanding, and problem-solving.

Cognitive Ability

The capacity to perform mental processes such as reasoning, problem-solving, and learning.

Cognitive Ability

Refers to the capacity of individuals to perform various mental processes like learning, thinking, reasoning, problem solving, decision making, remembering, and paying attention.