Deck 27: Leasing

Question 1

In a direct lease, the:

A) lessor is the end user of the leased asset.
B) lessee rents the asset from the manufacturer.
C) lessor is generally an independent leasing company.
D) lessee owns the asset.
E) lessee purchases the asset from the manufacturer.

Answer 1

lessor is generally an independent leasing company.

Question 2

Ron leases a car from Uptown Motors and pays $225 a month as a lease payment. Which one of the following terms applies to Uptown Motors?

A) Lessee
B) Lessor
C) Guarantor
D) Trustee
E) Manager

Answer 2

Lessor

Question 3

Ajax Rentals borrows money to purchase equipment which it then leases to customers. Ajax must pay its loan payments on this equipment even if the lessees fail to pay their lease payments. Which one of the following terms best describes one of these leases?

A) Single-investor lease
B) Sale and leaseback arrangement
C) Operating lease
D) Perpetual lease
E) Straight lease

Answer 3

Single-investor lease

Question 4

The party who uses a leased asset is called the:

A) lessee.
B) lessor.
C) guarantor.
D) trustee.
E) manager.

Question 5

Equipment Rentals borrows money on a nonrecourse basis to fund its purchases of construction equipment. This equipment is then leased to contractors. The leases are classified as tax-oriented leases. Which one of the following terms best describes one of these leases?

A) Leveraged lease
B) Sale and leaseback arrangement
C) Single-investor lease
D) Perpetual lease
E) Straight lease

Question 6

An operating lease has which one of the following characteristics?

A) The economic life of the asset equals the lease term.
B) The lessee has responsibility for the maintenance and insurance.
C) The lease payments recover the full cost of the asset.
D) The lessee can cancel the lease prior to the expiration date.
E) The lease term is relatively long term.

Question 7

Kate is leasing some equipment from Ajax Leasing for a period of one year. Ajax pays the maintenance, taxes, and insurance costs for this equipment. The life of the equipment is seven years. Which type of lease does Kate have?

A) Open
B) Straight
C) Operating
D) Financial
E) Tax-oriented

Question 8

Maria has a fully amortized 10-year lease on an industrial-grade sewing machine which requires her to pay all taxes, maintenance costs, and insurance premiums related to this lease. Which type of lease is this?

A) Open
B) Straight
C) Operating
D) Financial
E) Tax-oriented

Question 9

Which one of the following does not apply to the lessee of a sale and leaseback arrangement?

A) May have the option to repurchase the asset at the end of the lease term
B) Uses the asset
C) Receives payment for the sale in the form of lease payments
D) Forfeits ownership rights
E) Receives cash from the sale of the asset

Question 10

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

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

Question 11

Brentwood Industries is selling its tool and die equipment to Upward Financial and then leasing that equipment from Upward for a period of 10 years, which is the useful remaining life of the equipment. Which type of lease arrangement is this?

A) Leveraged lease
B) Sale and leaseback
C) Operating lease
D) Tax-oriented lease
E) Straight lease

Question 12

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

A) lease the equipment and retain the tax benefits.
B) lease the equipment with the lessor retaining the tax ownership of the asset.
C) borrow the money to buy the asset and then depreciate it using MACRS depreciation.
D) buy the equipment with cash and depreciate it using bonus depreciation.
E) buy the equipment and depreciate it straight-line over the life of the asset.

Question 13

A financial lease in which the lessor is the owner for tax purposes is called a(n) ________ lease.

A) open
B) straight
C) operating
D) tax-oriented
E) tax-exempt

Question 14

Which one of the following statements is correct?

A) The lessor is primarily concerned with returning the asset at the end of the lease term without incurring any additional charges.
B) The lessor is primarily concerned about the use of the asset.
C) If a computer manufacturer leased computers it built to others, it would be engaging in leveraged leasing.
D) A firm should always purchase, rather than lease, any asset that has a projected positive salvage value at the end of the relevant period of use.
E) Lessors provide a source of financing for lessees.

Question 15

Beginning in 2019, operating leases will be recorded:

A) only on the books of the lessor.
B) only on the income statement of the lessee as each lease payment is expensed.
C) as an asset on the balance with a value equal to the estimated residual value of the leased asset.
D) in the footnotes rather than on the balance sheet.
E) on the balance sheet of the lessee.

Question 16

A financial lease:

A) usually requires the lessor to maintain the leased asset.
B) is generally cancelable without penalty if the lessee provides 30 days advance notice.
C) is generally a partially amortized lease.
D) is generally a short-term lease.
E) may also be classified as a tax-oriented lease.

Question 17

If a firm enters a sale and leaseback agreement, then:

A) the lessor realizes an immediate cash inflow.
B) the lease automatically becomes a nonrecourse lease.
C) both the lessor and the lessee benefit.
D) the lessor benefits while the lessee loses.
E) the lessee must forfeit the right to repurchase the asset at a later date.

Question 18

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.

Question 19

A firm that is cyclical in nature and requires extra equipment only during its peak periods should consider leasing that extra equipment using a(n) ________ lease.

A) operating
B) tax-oriented
C) sale and buyback
D) leveraged
E) financial

Question 20

A financial lease:

A) is generally called a capital lease by accountants.
B) requires the lessor to maintain the asset.
C) is a partially amortized lease.
D) is often called a single net lease.
E) can generally be cancelled without penalty.

Question 21

You are comparing a lease to a purchase. When computing the net advantage to leasing you should discount the cash flows using the:

A) pretax cost of borrowing.
B) pretax risk-free rate.
C) aftertax borrowing rate.
D) aftertax risk-free rate.
E) aftertax interest rate implied by the lease payments.

Question 22

Lester's is analyzing a purchase versus a lease for some equipment costing $52,800, which would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The firm can borrow money at 6.5 percent and has a tax rate of 21 percent. What is the amount of the depreciation tax shield in Year 3?

A) $1,758
B) $1,643
C) $1,941
D) $2,012
E) $2,221

Question 23

Assume a lessor and a lessee can borrow at the same rate and also pay taxes at the same rate. Given this, then a lease between these parties:

A) will be a loss to both parties.
B) benefits both parties by the same amount.
C) is a zero-sum game.
D) will be disallowed by the IRS.
E) will always benefit the lessor at the expense of the lessee.

Question 24

Jamestown Supply is considering leasing some equipment for four years at an annual payment of $16,900. The firm has a pretax borrowing cost of 7.5 percent and a tax rate of 21 percent. What is the amount of the aftertax lease payment?

A) $16,103
B) $12,250
C) $12,667
D) $13,351
E) $13,820

Question 25

What does the IRS require if lease payments are to be tax deductible?

A) The lease term must be less than the life of the asset.
B) The lease payments must be less than comparable loan payments if the asset were purchased.
C) The initial present value of the lease payments must be less than 90 percent of the asset cost.
D) The lessee should have the option to purchase the asset at a discounted price at the end of the lease term.
E) The lease must be primarily for business purposes.

Question 26

Which one of these is considered to be the best reason for obtaining a capital lease?

A) To benefit from the implicit interest rate of a lease
B) To extend payments over a period of time
C) To avoid the restrictive covenants often found in loan agreements
D) To reduce the liabilities shown on the firm's balance sheet
E) To obtain 100 percent financing

Question 27

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

A) Tax reduction is a legitimate reason for leasing.
B) The lessee should be the party with the higher tax bracket.
C) Generally speaking, lessors tend to benefit from leases while lessees do not.
D) If a firm has significant net operating losses, it should be the lessor in a lease.
E) You should only lease an asset if the lease will be fully amortized.

Question 28

Which one of the following is most likely the primary reason why a lessee opts to lease an asset on a short-term basis rather than buy that asset?

A) To keep the asset off the balance sheet
B) To avoid taxes
C) To lower transaction costs
D) To increase collateral
E) To provide nonrecourse protection

Question 29

Rodriquez Co. is considering leasing some equipment that costs $58,000 and has a life of four years. The company has a tax rate of 21 percent and a cost of borrowed funds of 7.5 percent. If the annual lease payment is $15,600, what is the amount of the aftertax lease payment?

A) $9,433
B) $12,324
C) $9,863
D) $14,058
E) $12,929

Question 30

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

A) cost of equity financing.
B) pretax cost of borrowing.
C) aftertax cost of borrowing.
D) risk-free rate of return.
E) market rate of return on short-term assets.

Question 31

The most cited reason why firms enter into lease agreements is to:

A) lower taxes.
B) improve cash flows.
C) reduce uncertainty.
D) avoid balance sheet reporting.
E) bypass restrictive loan covenants.

Question 32

Which one of the following is an indicator that a lease is an operating lease for accounting purposes?

A) The lease transfers ownership of the asset to the lessee by the end of the lease term.
B) The lessee will probably exercise the option to purchase the leased asset.
C) The lease term represents a minor portion of the leased asset's economic life.
D) The residual value plus the present value of the lease payments exceeds the value of the leased asset.
E) The lessor has no use for the asset other than to lease it to the present lessee due to the specialized nature of that asset.

Question 33

The incremental cash flows of leasing consider all of the following except the:

A) cost of the asset.
B) lease payment amount.
C) applicable tax rate.
D) lost annual depreciation expense.
E) cost of the operator for the leased asset.

Question 34

Val's Pizzeria is contemplating leasing versus buying some new ovens costing $28,000, which would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The ovens can be leased for $12,500 a year. The firm can borrow money at 8 percent and has a tax rate of 21 percent. What is the amount of the depreciation tax shield in Year 2?

A) $3,019
B) $3,219
C) $2,613
D) $2,325
E) $3,608

Question 35

Assume the initial present value of the payments on a lease are equal to the cost of the leased asset. This capital lease is recorded as an asset on the balance sheet of the lessee in an amount equal to the:

A) dollar amount of each lease payment multiplied by the total number of lease payments in the original agreement.
B) dollar amount of each lease payment multiplied by the number of lease payments remaining.
C) dollar amount of each lease payment multiplied by the number of lease payments per year.
D) present value of the remaining lease payments.
E) lesser of the present value of the remaining lease payments or the present value of the lease payments for a one-year period.

Question 36

A firm will be indifferent to leasing versus buying when the:

A) NPV from leasing is zero.
B) asset is fully depreciated.
C) IRR from leasing is zero.
D) asset can be purchased at the end of the lease.
E) firm's tax rate is zero.

Question 37

Northern Lights is trying to decide whether to lease or buy some new equipment. The equipment costs $68,000 and has a life of three years. The company has a tax rate of 21 percent, a cost of borrowed funds of 8.75 percent, and uses straight-line depreciation over the life of the equipment. What is the amount of the annual depreciation tax shield?

A) $4,760
B) $5,878
C) $6,937
D) $7,087
E) $14,960

Question 38

The Corner Store is evaluating a lease on some equipment that costs $79,000 and has a two-year life. The pretax cost of borrowed funds is 8.4 percent and the tax rate is 21 percent. What is the amount of the annual depreciation tax shield for Year 1 and Year 2 if the firm uses 100 percent bonus depreciation?

A) $16,590; $0
B) $0; $16,590
C) $8,295; $8,295
D) $0; $0
E) $16,590; $8,295

Question 39

You should lease rather than buy when the:

A) IRR from leasing exceeds the aftertax cost of borrowing.
B) annual loan payments for a purchase are less than the annual lease payments.
C) NAL from leasing is positive.
D) IRR from leasing exceeds the risk-free rate of return.
E) asset's life is less than five years.

Question 40

The lost depreciation tax shield used in lease versus purchase analysis applies only when the lessee firm:

A) commits to purchasing the leased asset at the end of the lease term.
B) depreciates all of its assets on a straight-line basis.
C) commits to a lease term of three years or longer.
D) originally owned the equipment that it now plans to lease.
E) has sufficient taxable income to offset that tax shield.

Question 41

Ft. Myers Marina can lease $31,800 of equipment for $7,200 a year for five years. If purchased, the equipment would be depreciated over its 5-year life and then have a resale value of $5,900. The firm uses straight-line depreciation, borrows at 8 percent, and has a tax rate of 21 percent. What is the net advantage to leasing?

A) −$851
B) −$1,022
C) −$961
D) −$808
E) −$1,211

Question 42

CTS is analyzing the acquisition of $284,000 equipment that would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. After that time, the equipment would be worthless. The equipment can be leased for $82,100 a year for four years. The firm can borrow at 6 percent and has a tax rate of 23 percent. What is the net advantage to leasing?

A) -$1,982
B) -$607
C) $11
D) −$1,847
E) −$2,050

Question 43

MIG Tools can either lease or buy some equipment. The lease payments would be $12,800 a year and the purchase price is $35,900. The equipment has a 3-year life after which it is expected to have a resale value of $5,000. The firm uses 100 percent bonus depreciation, borrows money at 8 percent, and has a tax rate of 21 percent. What is the incremental cash flow for Year 1 if the company decides to lease the equipment rather than purchase it?

A) −$19,405
B) −$16,805
C) −$17,651
D) −$14,184
E) −$14,905

Question 44

The lease payments on $19,900 of equipment would be $3,800 a year. The equipment has a life of six years after which it is expected to have a resale value of $2,100. Assume a lessee uses straight-line depreciation, borrows at 11.5 percent, and has a tax rate of 23 percent. What amount should be included in the Year 6 cash flows when that firm computes the NAL?

A) −$5,306
B) −$6,234
C) −$4,471
D) −$4,407
E) −$5,512

Question 45

Williams' Paints is weighing a lease versus a purchase of $312,000 of fixed assets. The assets would be depreciated to zero over their 4-year life after which time they can be sold for an estimated $76,000. The firm uses straight-line depreciation and can borrow at 8 percent. The equipment can be leased for $66,000 a year for four years. The firm does not expect to owe any taxes for the next five years because of its operating losses. What is the net advantage to leasing?

A) $9,841
B) $11,904
C) $24,922
D) $28,208
E) $37,537

Question 46

Pressley's Inc. can purchase some equipment for $620,000 that has a life of four years, after which it will be worthless. The pretax cost of borrowed funds is 7.8 percent and the corporate tax rate is 21 percent. The firm expects significant operating losses for at least the next five years and thus expects to pay no taxes during this period. The equipment can be leased for $182,000 a year. What is the net advantage to leasing?

A) $14,500
B) −$3,431
C) $13,754
D) $20,628
E) −$7,967

Question 47

Cool Treats is considering either leasing or buying a new $30,900 freezer unit. The lessor will charge $11,900 a year for a two-year lease. The freezer has a two-year life after which time it is expected to have a resale value of $11,500. Cool Treats uses straight-line depreciation, borrows money at 7.5 percent, and has sufficient operating losses to offset any potential taxable income the firm might have over the next four years. What is the net advantage to leasing?

A) −$167
B) $238
C) $258
D) −$270
E) −$419

Question 48

A lessor will charge $30,500 a year for a five-year lease on equipment costing $136,000. The equipment has a 5-year life after which time it will be worthless. The lessee uses straight-line depreciation, has a tax rate of 21 percent, and borrows money at 8 percent. What is the net advantage to leasing?

A) $10,574
B) $5,507
C) $12,638
D) $6,283
E) $11,528

Question 49

National Rail can purchase equipment for $386,000 that would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent for Years 1 to 4, respectively. The equipment will be worthless after four years. The equipment can be leased for four years at $110,500 a year. The firm can borrow at 8 percent and has a tax rate of 21 percent. What is the net advantage to leasing?

A) $11,789
B) $10,862
C) $13,742
D) $12,087
E) $10,127

Question 50

Pizza Shoppes is considering either leasing or buying a new $24,000 oven. The lease payments would be $8,700 a year for three years. The oven would be depreciated on a straight-line basis over a three-year life and then be resold for $5,500. The firm borrows at 7 percent and has a tax rate of 21 percent. What is the net advantage to leasing?

A) -$2,809
B) -$1,833
C) −$2,084
D) −$2,760
E) −$1,899

Question 51

Steven's Auto is trying to decide whether to lease or buy some new equipment costing $23,000 that has a life of three years, after which it will be worthless. The aftertax discount rate is 5.8 percent. Assume the annual depreciation tax shield is $1,610 and the aftertax annual lease payment is $6,500. What is the net advantage to leasing?

A) $1,241
B) −$397
C) $1,585
D) $1,315
E) −$863

Question 52

The Box Store is considering the purchase of a delivery truck costing $49,000. The truck can be leased for three 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 three years. The corporate tax rate is 21 percent. The company does not expect to owe any taxes for the next several years due to large operating losses. The firm uses straight-line depreciation. What is the net advantage to leasing?

A) -$1,710
B) -$864
C) $1,304
D) −$1,006
E) $1,794

Question 53

Food Express is analyzing the purchase of some new equipment costing $73,000, which would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The equipment can be leased for $19,600 a year for four years. The firm can borrow money at 9.5 percent and has a tax rate of 21 percent. What is the incremental annual cash flow for Year 2 if the company decides to lease the equipment rather than purchase it?

A) −$22,297
B) −$22,797
C) −$21,312
D) −$21,798
E) −$22,821

Question 54

Cayman Productions is considering either leasing or buying some equipment. The lessor will charge $26,900 a year for a three-year lease. The purchase price is $72,600. The equipment has a three-year life after which time it will be worthless. The firm uses straight-line depreciation, borrows money at 8 percent, and expects sufficient losses to offset any taxes which otherwise might be owed for the next four years. What is the net advantage to leasing?

A) −$3,395
B) −$1,299
C) $3,276
D) $1,344
E) $2,858

Question 55

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 four years. Because of radiation contamination, it will actually be completely valueless in four years. You can lease it for $1,025,000 per year for four years. Assume the tax rate is 22 percent. You can borrow at 7.5 percent before taxes. What is the net advantage to leasing from your company's standpoint?

A) $46,217
B) $49,131
C) $50,776
D) $53,468
E) $54,117

Question 56

Rosewood Furniture is considering purchasing equipment costing $69,000 which it expects to sell at the end of Year 4 for $22,500. The firm uses MACRS depreciation with rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The equipment can be leased for $18,800 a year for four years. The firm can borrow at 7.5 percent and has a tax rate of 21 percent. What is the incremental annual cash flow for Year 4 if the company decides to lease the equipment rather than purchase it?

A) −$50,430
B) −$42,730
C) −$33,701
D) −$32,930
E) −$50,684

Question 57

Do-Rite Construction is evaluating the lease versus the purchase of a machine costing $168,000 that would be depreciated using MACRS over a four-year period, after which the machine would be worthless. MACRS rates are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent for Years 1 to 4, respectively. The machine could be leased for $46,500 a year for four years. The firm can borrow at 8.5 percent and has a tax rate of 21 percent. However, the firm does not expect to pay any taxes for the next five years. What is the net advantage to leasing?

A) −$4,502
B) $15,685
C) $18,640
D) −$1,651
E) $3,277

Question 58

A lessor will charge $13,800 a year for four years as lease payments on $47,800 of equipment. The equipment has a life of four years after which it should resell for $8,400. Your firm uses straight-line depreciation, borrows at 10 percent, and has a tax rate of 25 percent. What is the amount of the Year 4 cash flows when computing the NAL?

A) −$16,650
B) −$19,638
C) −$21,738
D) −$15,748
E) −$17,038

Question 59

Business Services needs some office equipment costing $37,000. The equipment has a 4-year life and would be depreciated using the MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The equipment can be leased for $10,300 a year. The firm can borrow at 7.5 percent and has a tax rate of 21 percent. What is the incremental annual cash flow for Year 3 if the company decides to lease the equipment rather than purchase it?

A) −$8,898
B) −$9,286
C) −$9,389
D) −$9,407
E) −$9,289

Question 60

A firm can either lease or buy some equipment costing $72,900. The lease payments would be $18,500 a year for four years. 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 tax rate of 21 percent. The company does not expect to owe any taxes for at least four years because of its operating losses. What is the incremental cash flow for Year 3 if the company decides to lease rather than purchase the equipment?

A) −$29,165
B) −$21,821
C) −$18,500
D) −$18,559
E) −$17,635

Question 61

If your firm purchases a machine costing $2 million, it would depreciate that machine straight-line to zero over four years, after which time the machine would be worthless. Your firm has a tax rate of 23 percent and borrows funds at 6 percent before taxes. Your firm is also considering leasing this machine. How much would the lease payment have to be in order for both the lessor and your firm to be indifferent about leasing?

A) $601,316
B) $521,909
C) $552,200
D) $563,333
E) $576,693

Question 62

Wildcat Oil Company is trying to decide whether to lease or buy a new computer system. The system would cost $6.7 million that would be depreciated straight-line to zero over its 4-year life and would provide $1.2 million in annual pretax cost savings. Wildcat's tax rate is 21 percent and its pretax borrowing cost is 9 percent. Lambert Leasing has offered to lease the system to Wildcat for payments of $1,850,000 per year for four years. Lambert's requires its lease payments to be paid at the beginning of each year. Lambert would also require Wildcat to pay a refundable $270,000 security deposit at the inception of the lease. What is the NAL of leasing the system?

A) $141,287
B) $157,395
C) $60,318
D) $138,828
E) $134,719

Question 63

A scanner that costs $2.8 million would be depreciated straight-line to zero over four years and then be worthless. Assume that both a lessor and a lessee have tax rates of 21 percent and borrow at a pretax rate of 7.5 percent. However, the lessee has operating losses and will not pay any taxes for at least the next five years. What range of lease payments will allow a lease on this scanner to be profitable for both parties?

A) $814,026 to $815,123
B) $804,026 to $805,481
C) $835,024 to $835,989
D) $845,123 to $846,417
E) $825,123 to $826,825

Question 64

An asset costs $640,000 and would be depreciated in a straight-line manner over its 4-year life. It will have no salvage value. The tax rate is 21 percent and the pretax cost of borrowing is 9 percent. What lease payment on this asset will make the lessee and the lessor equally well off?

A) $185,717
B) $194,141
C) $167,778
D) $197,235
E) $165,026

Question 65

A machine costs $2.2 million and would be depreciated straight-line to zero over four years after which it would be worthless. This machine can be leased for $645,000 per year for four years. Assume a tax rate of 21 percent and a pretax borrowing rate of 7 percent. What is the net advantage to leasing from the lessor's viewpoint?

A) −$10,621
B) −$9,988
C) −$4,464
D) −$12,082
E) −$8,840

Question 66

Frank's Auto can purchase new equipment for $136,000 cash that has a life of four years and a pretax residual value of $7,000 at the end of Year 4. Frank's uses MACRS depreciation with rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent for Years 1 to 4, respectively. Frank's pretax cost of debt is 7.5 percent and its tax rate is 21 percent. However, Frank's does not expect to owe any taxes for at least five years. The equipment can also be leased for $38,900 a year. What is the incremental annual cash flow for Year 4 if the company decides to lease rather than purchase this equipment?

A) −$45,900
B) −$31,900
C) $38,900
D) $45,900
E) $31,900

Question 67

A machine that will be worthless after five years costs $3.2 million. This machine can be leased for $760,000 per year for five years. Assume the machine, if purchased, would be depreciated straight-line to zero over its 5-year life. What is the net advantage to leasing this machine for a company that will pay no taxes over the lease period and has a pretax cost of borrowing of eight percent?

A) $282,706
B) $165,540
C) $121,409
D) $212,809
E) $228,315

Question 68

Turner's has decided to modernize its production facility by acquiring $2.4 million in new fixed assets that will be depreciated straight-line to zero over five years. This equipment will have no salvage value but will provide $1,880,000 in annual pretax cost savings. Turner's tax rate is 21 percent and its pretax cost of debt is 8.6 percent. Thrifty Leasing has offered a 5-year lease on this equipment with annual payments due at the beginning of each year. What is the maximum lease payment that would be acceptable to Turner's?

A) $593,231
B) $570,497
C) $404,506
D) $406,318
E) $611,472

Question 69

CT Motors borrows money at 8.35 percent, uses straight-line depreciation, and has a tax rate of 21 percent. The firm's break-even aftertax annual lease payment on a machine is $15,306. What amount would CT Motors pay to the lessor annually to break-even?

A) $18,992
B) $18,403
C) $17,620
D) $19,914
E) $19,375

Question 70

Suppose you are considering leasing a car. The price you and the dealer agree on is $32,000, which is the base capitalized cost. Other costs added to the capitalized cost price include the acquisition fee, insurance, and, if elected, the extended warranty. Assume these costs are $390. Capitalization cost reductions include any down payment, trade-in value, or rebates. Assume you make a down payment of $2,600, and there is no trade-in or rebate. If you drive 11,000 miles per year, the lease-end residual value for this car will be $18,700 after three years. The lease factor, which is the interest rate on the loan, is the APR of the loan divided by 2,400. The lease factor the dealer quotes you is .00208. The monthly lease payment consists of three parts; a depreciation charge, a finance fee, and sales tax. The depreciation fee is the net capitalization cost minus the residual value, divided by the term of the lease. The net capitalization cost is the cost of the car minus any cost reductions plus any additional costs. The finance fee is the net capitalization cost plus the residual value, times the money factor, and the monthly sales tax is the depreciation charge plus the finance fee, times the tax rate. What is your monthly lease payment for a 36-month lease if the sales tax is 7 percent?

A) $329
B) $343
C) $380
D) $402
E) $438

Question 71

Southern Mfg. can save $950,000 in annual pretax costs by acquiring $2.6 million of new equipment that would be depreciated straight-line to zero over four years. Assume the equipment would have an aftertax residual value of $500,000 at the end of four years. Southern's tax rate is 23 percent and its pretax cost of debt is 9 percent. Lambert Leasing has offered to lease this equipment in exchange for annual payments which would be payable at the beginning of each year. What is the maximum lease payment that would be acceptable to Southern Mfg?

A) $612,307
B) $634,515
C) $548,200
D) $651,646
E) $662,937