Your Firm Is Considering Leasing a Radiographic X-Ray Machine

question 36

Multiple Choice

Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. What is the after-tax cash flow from leasing relative to the after-tax cash flow from purchasing in year 0?

• A) -$100,000
• B) $15,000
• C) -$15,000
• D) -$125,000

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Definitions:

Perfect Complements

Goods that are often used together in fixed proportions, where the consumption of one item necessarily involves the consumption of the other.

Income Effect

The change in an individual's or economy's consumption patterns due to a change in real income, reflecting how increases or decreases in income can affect buying habits.

Substitution Effect

The alteration in purchasing behavior caused by variations in the relative costs of products, prompting buyers to opt for less expensive alternatives over pricier ones.

Price Change

An adjustment in the cost of a good or service in the market, which can be an increase or decrease due to various factors.