You Are the CFO of a Company

question 37

Multiple Choice

You are the CFO of a company.You are considering leasing photocopiers from the manufacturer instead of purchasing them for $200,000.You can borrow at 9 percent and the corporate tax rate is 35 percent.The lease payment will be $50,000 each year for 5 years,beginning immediately.At the end of the 5 years,the photocopiers will be worthless.Assume that the photocopiers can be depreciated by $40,000 per year for 5 years,for tax purposes.Should the firm lease the photocopiers?

• A) Yes, the IRR of the lease incremental cash flows is greater than the after-tax cost of borrowing.
• B) No, the IRR of the lease incremental cash flows is less than the after-tax cost of borrowing.
• C) Yes, the IRR of the lease incremental cash flows is less than the after-tax cost of borrowing.
• D) No, the IRR of the lease incremental cash flows is greater than the after-tax cost of borrowing.

Define and calculate opportunity costs in various economic scenarios.

Analyze the effects of high transaction costs on the number of exchanges and market efficiency.

Recognize how opportunity costs influence individual and business decisions.

Evaluate the impact of transaction costs on specialization and the law of comparative advantage.

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Definitions:

Baker

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The situation of working a significantly larger number of hours than the standard working time, often leading to stress and health issues.

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A measure of the responsiveness of the demand for a good to a change in its own price.

Lipitor

A pharmaceutical drug used to lower cholesterol and reduce the risk of heart disease.