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

question 26

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 $1.2 million,then the amount of the savings in year 0 from leasing is closest to:

• A)$3.8 million.
• B)$3.9 million.
• C)$4.0 million.
• D)$4.2 million.

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Definitions:

Repudiates

The action of refusing to accept, acknowledge, or be associated with; in contract law, it refers to the refusal to fulfill contractual obligations.

Sober

A state of being free from the influence of alcohol or drugs, characterized by clear thinking and the absence of intoxication.

Agency Agreement

A contract in which one party (the agent) agrees to act on behalf of another party (the principal) in business transactions.

Commission

A fee or percentage of a transaction paid to an agent or broker for facilitating a sale or service.