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Exam 27: Leasing

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Question 1

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

A) the lessor is responsible for the payments on the borrowed funds whether or not the lessee pays the lease payments.
B) the lessee must pay both the lease payment and the loan payment.
C) the loan is considered paid in full if the lessee discontinues making the lease payments or terminates the lease early.
D) the lessor is only obligated to make loan payments as long as the lessor is collecting the lease payments.
E) the lessor must pursue the lessee if the lessee fails to make the agreed upon lease payments.

F) None of the above
G) A) and C)

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Question 2

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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?

A) -$16,823
B) -$15,797
C) $14,312
D) $15,797
E) $16,823

F) All of the above
G) B) and E)

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Question 3

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Steven's Auto Detailers is trying to decide whether to lease or buy some new equipment for polishing vehicles.The equipment costs $22,000,has a 3-year life,and will be worthless after the 3 years.The aftertax discount rate is 6.2 percent.The annual depreciation tax shield is $1,760 and the aftertax annual lease payment is $6,800.What is the net advantage to leasing?

The incremental cash flows of leasing consider which of the following? I.cost of the asset II.lease payment amount III.applicable tax rate IV.annual depreciation expense

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 $3.5 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.You can lease it for $875,000 per year for 4 years.Assume the tax rate is 33 percent.You can borrow at 10 percent before taxes.What is the net advantage to leasing from your company's standpoint?

Explain the differences between purchasing an asset and leasing an asset.

Why might a firm opt to sell and leaseback an asset which it currently owns?

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?

Frozen Foods Delivery is considering the purchase of a delivery truck costing $49,000.The truck can be leased for 3 years at $19,500 per year or it can be purchased at an interest rate of 7.5 percent.The estimated life of the truck is 3 years.The corporate tax rate is 34 percent.The company does not expect to owe any taxes for the next several years due to accumulated net operating losses.The firm uses straight-line depreciation.What is the net advantage to leasing?

An operating lease has which of the following characteristics? I.lessee has responsibility for the maintenance and insurance II.lease payments cover the full cost of the asset III.economic life of the asset exceeds the lease term IV.lessee can cancel the lease prior to the expiration date

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

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 $3 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.You can lease it for $750,000 per year for 4 years.Assume the tax rate is 31 percent.You can borrow at 8 percent before taxes.Your company does not expect to pay taxes for the next several years,but the leasing company will pay taxes.What range of lease payments will allow the lease to be profitable for both parties?

Brentwood Industries is selling its tool and die equipment to Upward Financial and then leasing that equipment from Upward for a period of ten years,which is the useful remaining life of the equipment.Which type of lease arrangement is this?

Morrison Industrial Tool can either lease or buy some equipment.The lease payments would be $12,400 a year.The purchase price is $34,900.The equipment has a 3-year life after which it is expected to have a resale value of $5,500.The firm uses straight-line depreciation over the asset's life,borrows money at 8 percent,and has a 34 percent tax rate.What is the incremental cash flow for year 1 if the company decides to lease the equipment rather than purchase it?

If a firm does not expect to owe taxes for a few years and needs some equipment,the firm should:

Fireplaces and More is considering the purchase of a delivery truck costing $27,000.The truck will be used for 5 years and then it will be worthless.The financing rate for the purchase is 7.5 percent and the corporate tax rate is 32 percent.The firm uses straight-line depreciation.What is the break-even lease payment amount?

If a firm enters a sale and leaseback agreement,then: I.the lessee will benefit from an immediate cash inflow. II.both the lessor and the lessee may benefit if the lessor can benefit more from the tax benefits of ownership than can the lessee. III.the lease automatically becomes a nonrecourse lease. IV.the lessee forfeits the right to repurchase the asset at a later date.

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 $550,000 in annual pretax cost savings.The system costs $3 million and will be depreciated straight-line to zero over 4 years.It is estimated that the equipment will have an aftertax residual value of $500,000 at then end of the lease.Wildcat's tax rate is 31 percent,and the firm can borrow at 10 percent.Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $940,000 per year.Lambert's policy is to require its lessees to make payments at the start of the year.What is the maximum lease payment that would be acceptable to the company?

Which one of the following statements is correct concerning the lease versus buy decision?

Cayman Productions is considering either leasing or buying some new underwater photographic equipment.The lessor will charge $26,900 a year for a 2-year lease.The purchase price is $48,600.The equipment has a 2-year life after which time it will be worthless.Cayman uses straight-line depreciation,borrows money at 8 percent,and has sufficient tax loss carryovers to offset any taxes which otherwise might be owed for the next 4 years.What is the net advantage to leasing?