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

question 34

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 the amount of the lease-equivalent loan is closest to:

• A)$3.7 million.
• B)$3.8 million.
• C)$3.9 million.
• D)$4.0 million.

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Definitions:

Psychoanalytic Method

A clinical method for treating psychopathology, originating from Freudian theory, that involves exploring unconscious conflicts, desires, and experiences.

Bethlehem Hospital

An historical institution in London, known as Bedlam, originally a hospital dedicated to mental illness treatment.

Mentally Ill Persons

Individuals who experience significant disruptions in their thinking, feeling, mood, or behavior, associated with distress or impaired functioning.

Psychoanalysis

An insight therapy based on the theory of Freud, emphasizing the revealing of unconscious conflicts; Freud’s term for both the theory of personality and the therapy based on it.