LMNO Manufacturing Needs a New Laser and Is Comparing Buying

question 88

Multiple Choice

LMNO Manufacturing needs a new laser and is comparing buying or leasing. Under either alternative, the company will only need the laser for 5 years. Assume LMNO's marginal tax rate is 30 percent. Purchase Alternative: It would cost $50,000 to purchase the laser and the amount could be financed with a five-year balloon loan at 9%. The laser will be depreciated on straight line and have no salvage value. Maintenance on the laser is expected to be $1,200 per year.
Lease alternative: The company that manufactures the laser offers a 5-year leasing option with annual lease payments of $12,500. With this option, the lessor will be responsible for maintenance of the laser and will take it back after 5 years. The lease will be classified as an operating lease.
Which is the best option for LMNO Manufacturing? (Do not round the intermediate calculation. Round off final answer to the nearest dollar.)

• A) Purchase, the company will be $4,416 better off
• B) Lease, the company will be $4,416 better off
• C) Purchase, the company is $10,496 better off
• D) Lease, the company is $10,496 better off

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Definitions:

Total Assets

The sum of all current and non-current assets owned by a company, reflecting the company’s total resources that can be used to generate revenue.

Sales Data

Sales data encompasses the records and information regarding the quantity, price, and characteristics of products or services sold by a company.

Percentage Increase

A measure of how much a quantity has grown relative to its previous value, expressed as a percentage.

Horizontal Analysis

A financial analysis technique that compares historical financial data across consecutive periods to identify trends and growth patterns.