You Own a High-Tech Manufacturing Entity

question 209

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 amount of the annual after-tax lease payment to the lessee?

• A) $104,500
• B) $209,600
• C) $313,500
• D) $449,920
• E) $475,000

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Definitions:

Capital Budgeting

The process of evaluating and selecting long-term investments that are in line with the goal of a business's growth and financial stability.

Net Present Value Method

A method used in capital budgeting to assess the profitability of an investment, calculating the difference between the present value of cash inflows and outflows over a period of time.

Discounted Cash Flow Method

A valuation technique that estimates the value of an investment based on its expected future cash flows, adjusted for time value of money.

Net Present Value Method

A method used in capital budgeting to evaluate the profitability of an investment or project by calculating the difference between the present value of cash inflows and outflows.