Exam 16: Lease Financing: Concepts and Techniques

Which of the following statements about using the Net Present Value of the cost of leasing todetermine whether to lease or to purchase an asset is correct?

With an operating lease, the lessee - who uses the asset - is responsible for the maintenance of theasset.

If a company's cost of borrowing is 12% and its cost of capital is 7%, the salvage value of an asset should be discounted at 12%

With a lease, the lessee owns the asset.

If an asset qualifies for the investment tax credit (ITC), 10% of the asset's purchase cost can bededucted from federal tax payable.

A ___________is normally initiated by a firm that needs funds for operations. An asset previously owned by a lessee is sold to the lessor.

When is the Investment Tax Credit entered as a benefit in a lease-or-purchase analysis?

Annual lease payment (1st payment due when the lease is signed)$71 500CCA rate 30% Company's borrowing rate 10% Company's tax rate 40% Company's cost of capital 6.5% Investment Tax Credit Rate 10%New Brunswick Salmon Farms has asked for your opinion on whether to lease or purchase this asset. What should you say?

A company has a cost of capital of 5% and a tax rate of 40%. The present value of the tax on an asset that has a recapture of $2 677 and a 10-year useful life is $657

Which of the following statements about costs related to the maintenance and insurance of a leased asset is correct?

Which of the following statements about the lease payments and tax savings related to a lease is correct?

In a___________ , the lessor acts as an equity participant supplying part of the necessary capital while a lender supplies the remaining balance.

To determine the minimum lease payment the lessor may charge to cover their cost of capital, theNet Present Value (NPV) must be:

Which of the following statements about the characteristics of an operating lease and a financiallease is correct?

Rufus Brewing Company is considering the lease of new office furniture from National LeasingLimited. The furniture costs $11 250 and has an estimated economic life 5 years. The CCA rate is20% and Rufus Brewinghas a borrowing rate of 9% and a cost of capital of 8%. National Leasing's borrowing rate is 8.5% and its cost of capital is 6.6%. Both companies have a tax rate of 35%. What is the value of the tax shield for Rufus Brewing?

To which of the following companies would leasing be most beneficial:

At the end of the term of the lease agreement, the salvage value of an asset, if any, is realized by the lessee.

An operating lease and a financial lease have the same general characteristic: they both allow the lessee to use an asset in exchange for stated periodic payments.

SynSerge Limited has decided to acquire a machine, which will replace an existing piece of equipment. The company has the choice between leasing the new machine or purchasing it. The existing machine is currently worth $30 000, while the new machine would cost $405 850. With the new machine installed, SynSerge would reduce its costs by $86 500 a year. The new machine would have a useful life of 10 years, qualify for a 10% Investment Tax Credit (ITC) and have a salvage value after ten years of $45 000. This type of machine qualifies for a 30% CCA rate. For a 10-year lease the annual payment is expected to be $42 000 with the first payment due upon signing the lease contract. SynSerge's cost of capital is 10%, tax rate is 30% and the cost of raising long-term debt is estimated at 12%. What is the Net Present Value of the lease? Round your final answer tothe nearest dollar.

Zimco Limited, a market research company in Vancouver, is considering acquiring new computers worth about $10 000 to replace outdated ones. If Zimco ends up leasing these computers, what type of lease would the company most likely use?