Merkon Inc

question 111

Multiple Choice

Merkon Inc. must choose between purchasing a new asset for $86,000 or leasing the asset for four years for $27,500 annual rent. The purchased asset would be 3-year recovery property that Merkon could use for four years, after which the asset would have no salvage value. Assuming a 35% tax rate, an 8% discount rate, and no Section 179 deduction or 50% bonus depreciation, which of the following statements is true?

• A) Merkon's after-tax cost of the purchase is $5,953 less than the after-tax cost of the lease.
• B) Merkon's after-tax cost of the lease is $1,374 less than the after-tax cost of the purchase.
• C) Merkon's after-tax cost of the purchase is $8,226 less than the after-tax cost of the lease.
• D) None of the above

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Definitions:

Franchisee's Business

A business operation that a franchisee runs under the branding and operational model provided by a franchisor in exchange for fees and adherence to franchise guidelines.

Entire Unit

Refers to the whole part or entirety of something, often used in the context of living spaces or machinery.

Poor Performance

The failure to meet predetermined or expected standards or results in a job, project, or activity.

Right of First Refusal

A contractual right that gives its holder the option to enter a business transaction with the owner of something, before others can.