Northern Lights Is Trying to Decide Whether to Lease or Buy

question 64

Multiple Choice

Northern Lights is trying to decide whether to lease or buy some new equipment. The equipment costs $68,000 and has a life of three years. The company has a tax rate of 21 percent, a cost of borrowed funds of 8.75 percent, and uses straight-line depreciation over the life of the equipment. What is the amount of the annual depreciation tax shield?

• A) $4,760
• B) $5,878
• C) $6,937
• D) $7,087
• E) $14,960

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Definitions:

Original Value

The initial monetary worth of an asset or investment at the time of its purchase or acquisition.

Tangible Assets

Physical and measurable assets owned by a business, such as machinery, buildings, and inventory, as opposed to intangible assets like patents or copyrights.

Inventory

The total amount of goods and materials held by a company in stock, awaiting sale or use in production.

Equipment

Tangible assets used in the operation of a business, excluding inventory and fixed assets like buildings; includes machinery, vehicles, and furniture.