To Finance Some Manufacturing Tools It Needs for the Next

question 7

Multiple Choice

To finance some manufacturing tools it needs for the next 3 years,Waldrop Corporation is considering a leasing arrangement.The tools will be obsolete and worthless after 3 years.The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life.It can borrow $4,800,000,the purchase price,at 10% and buy the tools,or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them.The loan obtained from the bank is a 3-year simple interest loan,with interest paid at the end of the year.The firm's tax rate is 40%.Annual maintenance costs associated with ownership are estimated at $240,000,but this cost would be borne by the lessor if it leases.What is the net advantage to leasing (NAL) ,in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands. )

• A) $96
• B) $106
• C) $112
• D) $117
• E) $123

---

Definitions:

U.S. GAAP

United States Generally Accepted Accounting Principles, a framework of accounting standards, principles, and procedures used in the U.S. for financial reporting.

Earnings Per Share

A measure of a company's profitability, calculated as its net income divided by the total number of outstanding shares.

Income Statement

A financial statement that shows a company's revenues, expenses, and profits over a specific period.

Extraordinary Gains

Profits from events or transactions that are both unusual in nature and infrequent in occurrence, though this distinction has been eliminated in current accounting practices.