Your Firm Is Considering Leasing a New Radiographic Device

question 2

Multiple Choice

Your firm is considering leasing a new radiographic device. 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 because of technological obsolescence. 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 years 1-3?

• A) -$1,200
• B) -$1,577
• C) -$3,667
• D) -$13,000
• E) None of these.

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Definitions:

Security-market Line

A graphical representation of the relationship between expected return and beta (systematic risk) of an investment.

Capital-market Line

A line on a graph representing the rates of return for efficient portfolios that optimally balance risk and return, based on the risk-free rate and the market portfolio.

Capital-allocation Line

A line on a graph that represents the risk-and-return profiles of risky assets, showing the possible combinations of risk and return that are available.

Efficient Frontier

A concept in modern portfolio theory representing a set of optimal investment portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.