Use the Following Information to Answer the Question(s)below

question 8

Multiple Choice

Use the following information to answer the question(s) below.
Assume that it is 2012 and Rearden Metal is considering the purchase of a new blast furnace costing a total of $5 million.This furnace will qualify for accelerated depreciation: 20% can be expensed immediately,followed by 32%,19.2%,11.52%,11.52% and 5.76% over the next five years.However,because of Rearden's substantial tax loss carryforwards,Rearden estimates its marginal tax rate to be only 10% over the next five years.Since Rearden will get very little tax benefit from the depreciation expense,they consider leasing the furnace instead.Suppose that Rearden and the lessor face the same 8% borrowing rate,but the lessor has a 40% marginal tax rate.Assume that the furnace is worthless after five years,the lease term is five years,and a lease would qualify as a true tax lease.
-Assuming that Rearden's annual lease payments are $1.1 million,then Rearden Metal should:

• A)lease the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan.
• B)buy the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan.
• C)lease the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan.
• D)buy the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan.

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