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Exam 27: Leasing

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Question 1

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You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner (leasing is a very common practice with expensive,high-tech equipment) .The scanner costs $2 million and it would be depreciated straight-line to zero over 4 years.Because of radiation contamination,it will actually be completely valueless in 4 years.Assume the tax rate is 33 percent.You can borrow at 6 percent before taxes.How much would the lease payment have to be in order for both the lessor and the lessee to be indifferent about the lease?

A) $500,000
B) $521,909
C) $552,200
D) $563,333
E) $576,477

F) B) and D)
G) D) and E)

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Question 2

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What are some "good" reasons for opting to lease rather than purchase an asset?

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Students should provide reasons similar to those listed in the textbook,which are: 1.Taxes may be reduced by leasing. 2.The lease contract may reduce uncertainty. 3.Transaction costs may be lower with leasing. 4.Leasing may require fewer restrictive covenants than secured borrowing. 5.Leasing may encumber fewer assets than secured borrowing.

Question 3

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An operating lease:

Baxter Contractors is evaluating the lease versus the purchase of a $329,000 machine.The machine will be depreciated using MACRS over a 4-year period,after which the machine will be worthless.MACRS allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The machine could be leased for $105,000 a year for 4 years.The firm can borrow money at 9.5 percent and has a 35 percent tax rate.The firm does not expect to pay any taxes for the next 5 years.What is the net advantage to leasing?

Which one of the following is most likely the primary reason why a lessee opts to lease an asset on a short-term basis rather than buy that asset?

J&K Enterprises is considering either leasing or buying some new equipment.The lease payments would be $3,800 a year.The purchase price is $19,900.The equipment has a 6-year life after which it is expected to have a resale value of $2,100.Your firm uses straight-line depreciation,borrows money at 11.5 percent,and has a 33 percent tax rate.What is the aftertax salvage value of the equipment?

National Event Coordinators is contemplating the acquisition of a new tent that will be used for major outdoor events.The purchase price is $147,000.The firm uses MACRS depreciation which allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The tent will be worthless after four years.The tent can be leased for four years at $42,500 a year.The firm can borrow money at 7.5 percent and has a 34 percent tax rate.What is the net advantage to leasing?

Jamestown Supply is trying to decide whether to lease or buy some new equipment.The equipment costs $72,000,has a 4-year life,and will be worthless after the 4 years.The equipment will be replaced.The cost of borrowed funds is 9 percent and the tax rate is 34 percent.The equipment can be leased for $23,800 a year.What is the amount of the aftertax lease payment?

Val's Pizzeria is contemplating the acquisition of some new commercial ovens.The purchase price is $39,000.The equipment will be depreciated based on MACRS depreciation which allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The equipment will be worthless at the end of 4 years.The equipment can be leased for $12,500 a year.The firm can borrow money at 8 percent and has a 35 percent tax rate.What is the amount of the depreciation tax shield in year 3?

Cross Town Express is contemplating the acquisition of some new equipment.The purchase price is $74,000.The equipment would be depreciated using MACRS depreciation which allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The equipment would be worthless after that time.The equipment can be leased for $19,100 a year for 4 years.The firm can borrow money at 9.5 percent and has a 28 percent tax rate.What is the incremental annual cash flow for year 3 if the company decides to lease the equipment rather than purchase it?

Cool Treats is considering either leasing or buying a new freezer unit.The lessor will charge $11,900 a year for a 2-year lease.The purchase price is $32,000.The freezer has a 2-year life after which time it is expected to have a resale value of $9,000.Cool Treats uses straight-line depreciation,borrows money at 8 percent,and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next 5 years.What is the net advantage to leasing?

A financial lease:

Ron leases a car from Uptown Motors and pays $225 a month as a lease payment.Which one of the following terms applies to Ron?

Which one of the following will classify a lease as a capital lease for accounting purposes?

A capital lease is recorded as an asset on the balance sheet in an amount equal to:

A firm borrows money at 8.75 percent,uses straight-line depreciation,and has a 37 percent tax rate.The firm's break-even aftertax annual lease payment on a machine is $16,511.How much will the firm have to pay annually to the lessor to lease this machine?

An asset costs $420,000 and will be depreciated in a straight-line manner over its 3-year life.It will have no salvage value.The corporate tax rate is 32 percent,and the cost of borrowing is 8 percent.What lease payment amount will make the lessee and the lessor equally well off?

Which of the following apply to the lessee of a sale and leaseback arrangement? I.may have option to purchase asset at end of lease term II.receives cash from the sale of the asset III.maintains ownership rights IV.uses the asset

A financial lease in which the lessor is the owner for tax purposes is called a(n) _____ lease.

If a lessor borrows money on a nonrecourse basis to purchase an asset that will be leased to another party,then: