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

question 9

Multiple Choice

Use the following information to answer the question(s) below.
Rearden Metal is considering the purchase of a new blast furnace costing a total of $5 million dollars.This furnace will qualify for accelerated depreciation: 20% can be expense 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 carry forwards,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 effective after-tax lease borrowing rate is closest to:

• A)8.0%
• B)12.8%
• C)15.4%
• D)17.0%

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Definitions:

Competitive Advantage

A condition or circumstance that puts a company in a favorable or superior business position.

Quantity Discount Model

A pricing strategy where the price per unit of inventory is lowered when purchases exceed certain quantity thresholds, encouraging larger orders.

Acquiring Goods

The process of obtaining products or commodities for use, resale, or further production.

Lot Size

The quantity of a particular product made or purchased at one time, influencing inventory levels and production planning.