Northern Lights Is Trying to Decide Whether to Lease or Buy

question 70

Multiple Choice

Northern Lights is trying to decide whether to lease or buy some new equipment.The equipment costs $54,000,has a 5-year life,and will be worthless after the 5 years.The company has a tax rate of 34 percent,a cost of borrowed funds of 8.75 percent,and uses straight-line depreciation.The equipment can be leased for $14,100 a year.What is the amount of the annual depreciation tax shield?

• A)$3,672
• B)$5,878
• C)$6,936
• D)$8,407
• E)$10,200

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Definitions:

Lush Tropical Island

A region characterized by abundant vegetation, a warm climate, and located within the tropics, often considered ideal for tourism and agriculture.

Economy

The large set of interrelated economic production and consumption activities that aid in determining how scarce resources are allocated.

Money

A medium of exchange that facilitates the transfer of goods and services, acting as a unit of account, a store of value, and sometimes, a standard of deferred payment.

Deposits

Money placed into a financial institution for safekeeping, which can earn interest over time.