You Are the CFO of a Company

question 12

Multiple Choice

You are the CFO of a company.You are considering leasing photocopiers from the manufacturer instead of purchasing them for $200,000.You can borrow at 9.0% and the corporate tax rate is 35.0%.The lease payment will be $50,000 each year for 5 years, beginning immediately.At the end of the 5 years, the photocopiers will be worthless.Assume that the photocopiers can be depreciated by $40,000 per year for 5 years, for tax purposes.Should the firm lease the photocopiers?

• A)Yes, the IRR of the lease incremental cash flows is greater than the after-tax cost of borrowing.
• B)No, the IRR of the lease incremental cash flows is less than the after-tax cost of borrowing.
• C)Yes, the IRR of the lease incremental cash flows is less than the after-tax cost of borrowing.
• D)No, the IRR of the lease incremental cash flows is greater than the after-tax cost of borrowing.

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Definitions:

Default

Default refers to the failure to repay a loan according to the terms agreed to in the promissory note.

Federal Unemployment Tax Return

This is a tax form filed by employers to report the federal unemployment taxes they have paid, used to fund state workforce agencies.