Merkon Inc

question 27

Multiple Choice

Merkon Inc. must choose between purchasing a new asset for $86,000 or leasing the asset for four years for $27,500 annual rent. The purchased asset would be 3-year recovery property that Merkon could use for four years, after which the asset would have no salvage value. Assuming a 21% tax rate, an 8% discount rate, and no Section 179 deduction or bonus depreciation, which of the following statements is true? Use Appendix A, Table 7-2. (Round discount factor(s) to 3 decimal places.)

• A) Merkon's after-tax cost of the purchase is $8,517 less than the after-tax cost of the lease.
• B) Merkon's after-tax cost of the lease is $1,374 less than the after-tax cost of the purchase.
• C) Merkon's after-tax cost of the purchase is $8,517 more than the after-tax cost of the lease.
• D) None of these choices are correct.

---

Definitions:

Net Operating Income

A company's income after operational expenses have been deducted but before taxes and interest are considered.

Milling Machine Minutes

A measure of manufacturing time that represents the total minutes a milling machine is engaged in production.

Monthly Demand

The total quantity of a product or service that consumers are willing and able to purchase in a month.

Selling Price

The amount a buyer pays to purchase a product, determined by cost, market demand, and competition.