Ellis Enterprises Is Considering Whether to Lease or Buy Some

Multiple Choice

Ellis Enterprises is considering whether to lease or buy some necessary equipment it needs for a project that will last the next 3 years.If the firm buys the equipment,it will borrow $4,800,000 at 8% interest.The firm's tax rate is 35% and the firm's before-tax cost of debt is 8%.Annual maintenance costs associated with ownership are estimated to be $300,000 and the equipment will be depreciated on a straight-line basis over 3 years.What is the annual end-of-year lease payment (in thousands of dollars) for a 3-year lease that would make the firm indifferent between buying or leasing the equipment? (Suggestion: Delete 3 zeros from dollars and work in thousands.)

A) $1,950
B) $2,052
C) $2,160
D) $2,268
E) $2,382