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Exam 22: Leasing

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Question 41

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Knight Motors is considering either leasing or buying some new equipment. The lease payments would be $14,500 a year for 3 years. The purchase price is $52,000. The equipment has a 3-year life and then is expected to have a resale value of $12,000. Knight Motors uses straight-line depreciation, borrows money at 9 percent, and has a 35 percent tax rate. What is the net advantage to leasing?

A) -$2,742
B) -$2,212
C) -$1,611
D) $3,529
E) $3,898

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

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Question 42

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You own a high-tech manufacturing entity. You would like to expand your operations but to do so you need to either lease or buy a $1.2 million piece of equipment for the next three years. The lease payments would be $475,000 a year for the three years. If the equipment is purchased, it will be depreciated straight-line to zero over the three-year period. The equipment will have no residual value at the end of the three years. Should the equipment be leased, the lessor and the lessee will both have marginal tax rates of 34%. The loan rate for your firm for this purpose is 8% pre-tax. What is the net advantage from leasing from the lessor's point of view?

A) -$148,500
B) -$62,548
C) -$17,706
D) $17,706
E) $62,548

F) A) and B)
G) A) and E)

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Question 43

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What are some of the bad reasons for leasing? Briefly explain each.

Calvada Productions signs a lease agreement with Lessor, Inc. According to the terms of the lease, ownership of the leased asset will be transferred to Calvada at the end of the lease term for $5,000, which is estimated to be the fair-market value of the asset at that time. This lease should be classified as an operating lease for accounting purposes.

One of the primary advantages of a sale and leaseback arrangement is the:

A contractual agreement between the lessee and an independent leasing company is called a:

If the lessee is generally responsible for the maintenance of the leased asset, then this scenario represents a characteristic of an operating lease.

What is the present value of the depreciation tax shield?

Which of the following is the best definition of a lessee?

Leasing equipment due to a desire to avoid capitalization of the asset is considered an example of leasing to reduce uncertainty.

If a firm enters a sale and leaseback agreement, then the lessee will benefit from an immediate cash inflow.

If the lease term is at least 70% of the estimated economic life of the asset, this would cause a lease to be declared a capital lease for accounting purposes.

Your company needs some research equipment which belongs to Class 10 (CCA Rate 30%) . The cost of the equipment is $850,000. You can borrow at 12% and the tax rate is 34%. You can lease the equipment for $270,000 a year for four years. It has no salvage value. What is the net advantage to leasing?

A sale and leaseback is defined as an arrangement wherein the ______ sells an asset and the ______ leases the asset.

You work for a chemical company which needs a new distillation unit. The unit costs $100,000, must be replaced in five years, and is worthless at that time. It falls under Class 8 (CCA rate 20%) . The firm can borrow at 10.5%. The equipment can be leased for $25,000. The tax rate is 30%. What is the after-tax lease payment?

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

The chapter describes the "leasing paradox". What is this paradox? Would you call leasing a "zero-sum game"? Under what conditions can leasing be financially advantageous for both the lessor and the lessee?

Your firm is considering either leasing or buying some new equipment. The lessor will charge $17,500 a year for 3 years should you decide to lease. The purchase price is $61,000. The equipment has a 3-year life after which it is expected to have a resale value of $13,000. Your firm uses straight-line depreciation, borrows money at 9 percent, and has a 34 percent tax rate. What is the after-tax salvage value of the equipment?

What is the break-even lease payment?

Stoner Equipment needs $130,000 of new equipment for a project. The equipment will be worthless after 4 years. The equipment belongs in a 35 percent CCA class. The equipment can be leased for $34,500 a year. The firm can borrow money at 8.5 percent and has a 35 percent tax rate. What is the net advantage to leasing?