Your Firm Is Considering Leasing a New Computer

question 32

Multiple Choice

Your firm is considering leasing a new computer. The lease lasts for 9 years. The lease calls for 10 payments of $1,000 per year with the first payment occurring immediately. The computer would cost $7,650 to buy and would be straight-line depreciated to a zero salvage over 9 years. The actual salvage value is negligible because of technological obsolescence. The firm can borrow at a rate of 8%. The corporate tax rate is 30%. What is the appropriate discount rate for valuing the lease?

• A) 12.12%
• B) 8.0%
• C) 5.60%
• D) 2.72%

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Definitions:

Relevant Range

The range of activity within which the assumptions about fixed and variable costs in cost-volume-profit analysis are valid.

Fixed Costs

Expenses that do not change with the level of production or sales, such as rent, salaries, and insurance.

Contribution Margin

The difference between sales revenue and variable costs, representing the amount that contributes towards covering fixed costs and generating profit.

Weighted Average

A calculation that takes into account the varying degrees of importance of the numbers in a data set, used in financial analysis and grading.