ExpertMedium1 markMultiple Choice
CPA · Question 22 · Area I: Business Analysis
A company is deciding whether to lease or buy a machine. <br/>- Purchase Price: $100,000. Useful life 5 years. Salvage value $0.<br/>- Lease: 5 annual payments of $23,000 paid at the beginning of each year.<br/>- Discount rate: 8%.<br/>- Tax rate: 30%.<br/><br/>Which factor is LEAST relevant to this decision?
A company is deciding whether to lease or buy a machine. <br/>- Purchase Price: $100,000. Useful life 5 years. Salvage value $0.<br/>- Lease: 5 annual payments of $23,000 paid at the beginning of each year.<br/>- Discount rate: 8%.<br/>- Tax rate: 30%.<br/><br/>Which factor is LEAST relevant to this decision?
Answer options:
A.
The tax shield from depreciation if purchased.
B.
The tax deductibility of lease payments.
C.
The present value of the after-tax cash flows.
D.
Allocated corporate overhead costs.
How to approach this question
Identify relevant vs irrelevant costs. Relevant costs differ between alternatives. Allocated overhead usually doesn't change.
Full Answer
D.Allocated corporate overhead costs.✓ Correct
D
Allocated corporate overhead is typically a fixed cost that will be incurred regardless of whether the machine is leased or purchased. Therefore, it is not a relevant cost for the decision.
Common mistakes
Thinking all costs are relevant.
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