Merkon Inc

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?

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