You Own a High-Tech Manufacturing Entity

question 133

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 present value of the depreciation tax shield?

• A) $28,750
• B) $56,250
• C) $68,518
• D) $95,456
• E) $107,359

---

Definitions:

Social Skills Training

A therapeutic approach designed to improve interpersonal skills through teaching and practice.

Rational Emotive Therapy

A form of cognitive-behavioral therapy that focuses on identifying irrational beliefs, challenging these beliefs, and replacing them with more rational ones to facilitate emotional well-being.

Drug Therapy

A type of treatment involving the prescription and use of medications to treat illness and improve health.

Systematic Desensitization

A behavioral therapy technique used to reduce phobic responses or anxiety through gradual exposure to the feared object or situation coupled with relaxation or coping techniques.