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Exam 27: Leasing

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Question 1

Multiple Choice

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Ajax Rentals borrows money to purchase equipment which it then leases to customers. Ajax must pay its loan payments on this equipment even if the lessees fail to pay their lease payments. Which one of the following terms best describes one of these leases?

A) Single-investor lease
B) Sale and leaseback arrangement
C) Operating lease
D) Perpetual lease
E) Straight lease

F) C) and D)
G) A) and B)

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A

Question 2

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Steven's Auto is trying to decide whether to lease or buy some new equipment costing $23,000 that has a life of three years, after which it will be worthless. The aftertax discount rate is 5.8 percent. Assume the annual depreciation tax shield is $1,610 and the aftertax annual lease payment is $6,500. What is the net advantage to leasing?

A) $1,241
B) −$397
C) $1,585
D) $1,315
E) −$863

F) C) and D)
G) B) and D)

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Question 3

Multiple Choice

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Cayman Productions is considering either leasing or buying some equipment. The lessor will charge $26,900 a year for a three-year lease. The purchase price is $72,600. The equipment has a three-year life after which time it will be worthless. The firm uses straight-line depreciation, borrows money at 8 percent, and expects sufficient losses to offset any taxes which otherwise might be owed for the next four years. What is the net advantage to leasing?

If a firm enters a sale and leaseback agreement, then:

A firm will be indifferent to leasing versus buying when the:

Wildcat Oil Company is trying to decide whether to lease or buy a new computer system. The system would cost $6.7 million that would be depreciated straight-line to zero over its 4-year life and would provide $1.2 million in annual pretax cost savings. Wildcat's tax rate is 21 percent and its pretax borrowing cost is 9 percent. Lambert Leasing has offered to lease the system to Wildcat for payments of $1,850,000 per year for four years. Lambert's requires its lease payments to be paid at the beginning of each year. Lambert would also require Wildcat to pay a refundable $270,000 security deposit at the inception of the lease. What is the NAL of leasing the system?

Rodriquez Co. is considering leasing some equipment that costs $58,000 and has a life of four years. The company has a tax rate of 21 percent and a cost of borrowed funds of 7.5 percent. If the annual lease payment is $15,600, what is the amount of the aftertax lease payment?

Which one of the following does not apply to the lessee of a sale and leaseback arrangement?

Kate is leasing some equipment from Ajax Leasing for a period of one year. Ajax pays the maintenance, taxes, and insurance costs for this equipment. The life of the equipment is seven years. Which type of lease does Kate have?

Assume the initial present value of the payments on a lease are equal to the cost of the leased asset. This capital lease is recorded as an asset on the balance sheet of the lessee in an amount equal to the:

Food Express is analyzing the purchase of some new equipment costing $73,000, which would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The equipment can be leased for $19,600 a year for four years. The firm can borrow money at 9.5 percent and has a tax rate of 21 percent. What is the incremental annual cash flow for Year 2 if the company decides to lease the equipment rather than purchase it?

Williams' Paints is weighing a lease versus a purchase of $312,000 of fixed assets. The assets would be depreciated to zero over their 4-year life after which time they can be sold for an estimated $76,000. The firm uses straight-line depreciation and can borrow at 8 percent. The equipment can be leased for $66,000 a year for four years. The firm does not expect to owe any taxes for the next five years because of its operating losses. What is the net advantage to leasing?

An operating lease has which one of the following characteristics?

Equipment Rentals borrows money on a nonrecourse basis to fund its purchases of construction equipment. This equipment is then leased to contractors. The leases are classified as tax-oriented leases. Which one of the following terms best describes one of these leases?

A machine that will be worthless after five years costs $3.2 million. This machine can be leased for $760,000 per year for five years. Assume the machine, if purchased, would be depreciated straight-line to zero over its 5-year life. What is the net advantage to leasing this machine for a company that will pay no taxes over the lease period and has a pretax cost of borrowing of eight percent?

National Rail can purchase equipment for $386,000 that would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent for Years 1 to 4, respectively. The equipment will be worthless after four years. The equipment can be leased for four years at $110,500 a year. The firm can borrow at 8 percent and has a tax rate of 21 percent. What is the net advantage to leasing?

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

The lease payments on $19,900 of equipment would be $3,800 a year. The equipment has a life of six years after which it is expected to have a resale value of $2,100. Assume a lessee uses straight-line depreciation, borrows at 11.5 percent, and has a tax rate of 23 percent. What amount should be included in the Year 6 cash flows when that firm computes the NAL?

In a direct lease, the:

The incremental cash flows of leasing consider all of the following except the: