To Finance Some Manufacturing Tools It Needs for the Next

question 7

Multiple Choice

To finance some manufacturing tools it needs for the next 3 years,Waldrop Corporation is considering a leasing arrangement.The tools will be obsolete and worthless after 3 years.The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life.It can borrow $4,800,000,the purchase price,at 10% and buy the tools,or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them.The loan obtained from the bank is a 3-year simple interest loan,with interest paid at the end of the year.The firm's tax rate is 40%.Annual maintenance costs associated with ownership are estimated at $240,000,but this cost would be borne by the lessor if it leases.What is the net advantage to leasing (NAL) ,in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands. )

• A) $96
• B) $106
• C) $112
• D) $117
• E) $123

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