Exam 22: Leasing

Your firm needs to either buy or lease $230,000 worth of vehicles. These vehicles have a life of 4 years after which time they are worthless. The vehicles belong in CCA class 10 (a 30% class) and can be leased at a cost of $68,000 a year for the 4 years. The corporate tax rate is 34% and the cost of debt is 10%. What is the amount of the after-tax lease payment?

Based upon the standards issued by CICA, a financial lease must be capitalized if the PV of the lease payments is at least 75% of the fair market value of the asset at the commencement of the lease.

Jasper Manufacturing is starting a new project which will require the acquisition of new fixed assets costing $127,000. The assets will have a 5-year life after which time they will be worthless. The assets belong in a 25 percent CCA class. The assets can be leased for $27,900 a year. The firm can borrow money at 11 percent and has a 34 percent tax rate. What is the amount of the depreciation tax shield in year 3?

A tax-oriented lease can best be defined as:

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 to leasing amount from the perspective of the lessee?

One legitimate advantage to leasing is that:

Based upon the standards issued by CICA, a financial lease must be capitalized if the lessee receives title to the asset by the end of the lease term.

Maxine's is considering either purchasing or leasing a $600,000 piece of specialized equipment. The equipment has a life of 5 years, belongs in a 30% CCA class, and will have no residual value. The cost of debt is 12% for this purchase. A lease on the equipment for 5 years is priced at $150,000 a year. Maxine's corporate tax rate is 34%. The lessor has a tax rate of 35%. What is the net advantage to leasing for the lessor?

For a lease to be deemed valid by the CRA for tax purposes, the purpose of the lease must NOT be primarily for the purpose of tax avoidance.

The Auto Mart is trying to decide whether to lease or buy some new equipment. The equipment costs $74,000, has a 3-year life, and will be worthless after the 3 years. The after-tax discount rate is 5.5 percent. The annual CCA tax shield is $8,633 and the after-tax annual lease payment is $16,033. What is the net advantage to leasing?

The textbook mentioned that managerial compensation sometimes creates an incentive to lease and that may create an agency problem. Explain this situation and how the agency problem might be addressed.

Marschall's is trying to decide whether to lease or buy some new equipment. The equipment costs $62,000 and has a 4-year life. The equipment will be worthless after the 4 years and will have to be replaced. The company has a tax rate of 35 percent, a cost of borrowed funds of 9 percent. The equipment can be leased for $16,500 a year. What is the amount of the after-tax lease payment?

According to CRA's regulations, the existence of a bargain purchase option will not affect the ability of the lessee to deduct the lease payments from taxable income.

Your company is considering the purchase of a fleet of cars for $195,000. It can borrow at 8.5%. The cars can be leased for $55,000 per year and will be worthless at the end of four years. The corporate tax rate is 34% and the cars belong in CCA class 10 (a 30% class). If you do not expect to pay taxes for the next four years, what is the net advantage to leasing?

An arrangement wherein the lessee is the owner of the asset for tax purposes is called a:

Leasing likely works best when lessee firms are in relatively high tax brackets, while lessor firms are in relatively low tax brackets.

Smith Meats is trying to decide whether to lease or buy some new equipment. The equipment costs $62,000, has a 3-year life, and will be worthless after the 3 years. The pre-tax cost of borrowed funds is 9 percent and the tax rate is 35 percent. The equipment can be leased for $22,500 a year. What is the net advantage to leasing assuming the firm is allowed to use straight-line method to account for depreciation?

Uptown Stores is contemplating the acquisition of some new equipment. The purchase price is $52,000. 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 $14,000 a year for 4 years. The firm can borrow money at 9 percent and has a 35 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 tax-oriented lease is a(n) _____ lease in which the _____ is the owner for tax purposes.

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