Your Firm Is Considering Leasing a New Radiographic Device

question 16

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 would the after-tax cash flow in year 3 be if the asset had a residual value of $1,000 (ignoring any possible risk differences) ?

• A) $4,067
• B) $1,000
• C) -$1,000
• D) -$4,067
• E) None of these.

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Definitions:

Miserly Friend

Refers to a person who is exceedingly frugal to the point of being stingy or tightfisted with money.

Interest Per Month

The amount of interest charged or earned on an account or loan, calculated on a monthly basis.

Borrowing

The act of obtaining funds from another party with the promise to repay the principal amount along with interest.

Compounded Annually

When interest is compounded annually, it means the interest earned on an investment is added to the principal at the end of each year, with future interest calculations based on the new total.