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Exam 27: Leasing

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Question 21

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The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil exploration business.Management has decided that it must use the system to stay competitive; it will provide $1.2 million in annual pretax cost savings.The system costs $6.7 million and will be depreciated straight-line to zero over 4 years.Wildcat's tax rate is 35 percent,and the firm can borrow at 11 percent.Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1,700,000 per year.Lambert's policy is to require its lessees to make payments at the start of the year.Lambert requires Wildcat to pay a $270,000 security deposit at the inception of the lease.What is the NAL of leasing the equipment?

A) $541,287
B) $658,844
C) $660,318
D) $661,828
E) $664,719

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

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Question 22

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A leveraged lease is a:

A) lease where the lessee is the owner of the asset for tax purposes.
B) sale and leaseback arrangement.
C) type of operating lease.
D) lease paid with money borrowed by the lessee.
E) lease where the lessor borrows on a nonrecourse basis.

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

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Question 23

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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?

Explain the "leasing paradox" and also explain why leasing is or is not a "zero sum game".

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?

Which one of the following statements is correct concerning taxes and leasing?

Which one of the following correctly states one of the conditions established by the IRS for a lease to be considered valid for tax purposes?

The party who owns a leased asset is called the:

An operating lease:

You are comparing a lease to a purchase.The NPV associated with this analysis is referred to as the:

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?

Fargo North is considering the purchase of some new equipment costing $118,000.This equipment has a 5-year life after which it will be worthless.The firm uses straight-line depreciation and borrows funds at 9 percent interest.The company's tax rate is 33 percent.The firm also has the option of leasing the equipment.What is the amount of the break-even lease payment?

A financial lease: I.is generally a fully amortized lease. II.usually requires the lessee to insure the asset. III.is generally cancelable without penalty if the lessee provides 30 days advance notice. IV.is referred to as a capital lease by accountants.

Alfredo has a non-cancelable,five year lease on an industrial-grade sewing machine for stitching upholstery.For accounting purposes,this is considered to be a capital lease.The life of the sewing machine is five years.Alfredo must pay all taxes and insurances related to this lease.Which type of lease does Alfredo have on this sewing machine?

A firm can either lease or buy some new equipment.The lease payments would be $18,500 a year for 4 years.The purchase price is $72,900.The equipment has a 4-year life after which it is expected to have a resale value of $3,600.The firm uses straight-line depreciation over the life of the asset,borrows money at 11 percent,and has a 35 percent tax rate.The company does not expect to owe any taxes for at least 4 years because it has accumulated net operating losses.What is the incremental cash flow for year 3 if the company decides to lease rather than purchase the equipment?

Green Valley Farms is considering either leasing or buying some new farm equipment.The lessor will charge $27,500 a year for a 5-year lease.The purchase price is $136,000.The equipment has a 5-year life after which time it will be worthless.Green Valley Farms uses straight-line depreciation,has a 32 percent tax rate,borrows money at 10 percent,and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next five years.What is the net advantage to leasing?

Frank's Auto Repair can purchase a new machine for $136,000.The machine has a 4-year life and can be sold at the end of year 4 for $12,000.Frank's 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 equipment can be leased for $35,900 a year.The firm can borrow money at 7.5 percent and has a 32 percent tax rate.The company does not expect to owe any taxes for at least the next 4 years due to net operating losses.What is the incremental annual cash flow for year 4 if the company decides to lease rather than purchase the equipment?

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?

The relevant discount rate for evaluating a lease is the firm's:

Your firm is considering either leasing or buying some new equipment.The lessor will charge $13,800 a year for 4 years should you decide to lease.The purchase price is $47,800.The equipment has a 4-year life after which it is expected to have a resale value of $8,400.Your firm uses straight-line depreciation,borrows money at 10 percent,and has a 33 percent tax rate.What is the aftertax salvage value of the equipment?