Artisan's Is Considering Leasing a New Computer

question 20

Multiple Choice

Artisan's is considering leasing a new computer.The lease terms include five annual payments of $1,500 with the first payment occurring when the lease is signed.The computer would cost $7,200 to buy and would be depreciated straightline to a zero salvage value over 5 years.The actual salvage value is negligible because of technological obsolescence.The firm can borrow at a rate of 8 percent and has a tax rate of 21 percent.What is the cash flow from leasing relative to purchasing in Year 3?

• A)−$1,325.50
• B)−$1,487.40
• C)−$1,295.10
• D)−$1,380.00
• E)−$975.50

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Definitions:

Opportunity Cost

The price paid for not choosing the second-best option during decision-making.

Higher Opportunity Cost

The increased potential loss of choosing one option over another, indicating a sacrifice of higher value alternatives.

Absolute Advantage

The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service.

Comparative Advantage

The capacity of a nation, person, business, or area to generate a product or offer a service with a smaller opportunity cost compared to its rivals.