A Piece of Capital Equipment Which a Company Needs for the Next

Multiple Choice

A piece of capital equipment which a company needs for the next three years will cost $150,000 to purchase, with residual value of $50,000. The company can finance the purchase with a loan at 8% requiring quarterly payments. Alternately, the company can undertake a capital lease for the same machinery at $11,494 a quarter and a promise to return the machine at a value of $50,000. Why might the company choose the leasing alternative over the purchase alternative?

A) The NPV of the leasing option is higher than the purchase option.
B) The lease is capitalized, presenting a greater tax write-off than the loan and, therefore, a lower overall cost.
C) The company would have legal control of the asset, how it is used and maintained and its disposal.
D) Lease payments present a lower cash outflow per month than the purchase.
E) The interest being charged on the lease is lower than on the loan.