Merkon Inc A) Merkon's After-Tax Cost of the Purchase Is $5,953 Less

Multiple Choice

Merkon Inc. must choose between purchasing a new asset for $86,000 or leasing the asset for four years for $27,500 annual rent. The purchased asset would be 3-year recovery property that Merkon could use for four years, after which the asset would have no salvage value. Assuming a 35% tax rate, an 8% discount rate, and no Section 179 deduction or 50% bonus depreciation, which of the following statements is true? $$\begin{array} { c c c c c r } \text { Year } & \text { Cost } & \text { MACRS } & \text { Tax Savings } & \text { Discount } & \text { NPV } \\\mathbf { 0 } & ( \mathbf { 8 6 , 0 0 0 ) } & \mathbf { 2 8 , 6 6 4 } & \mathbf { 1 0 , 0 3 2 } & \mathbf { n } / \mathbf { a } & ( \mathbf { 7 5 , 9 6 8 } ) \\1 & & \mathbf { 3 8 , 2 2 7 } & \mathbf { 1 3 , 3 8 0 } & \mathbf { 9 2 6 } & \mathbf { 1 2 , 3 9 0 } \\\mathbf { 2 } & & \mathbf { 1 2 , 7 3 7 } & \mathbf { 4 , 4 5 8 } & \mathbf { . 8 5 7 } & \mathbf { 3 , 8 2 1 } \\4 & & \mathbf { 6 , 3 7 2 } & \mathbf { 2 , 2 3 0 } & .794 & \underline { 1,771 } \\& & & & & ( \underline { 57,980 } ) \end{array}$$

A) Merkon's after-tax cost of the purchase is $5,953 less than the after-tax cost of the lease.
B) Merkon's after-tax cost of the lease is $1,374 less than the after-tax cost of the purchase.
C) Merkon's after-tax cost of the purchase is $8,226 less than the after-tax cost of the lease.
D) None of the above