FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 27: Leasing

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 21

Multiple Choice

Review LaterAdd Note

Review Later

Automobiles are often leased,and several terms are unique to auto leases.Suppose you are considering leasing a car.The price you and the dealer agree on for the car is $32,000.This is the base capitalized cost.Other costs added to the capitalized cost price include the acquisition (bank) fee,insurance,or extended warranty.Assume these costs are $390.Capitalization cost reductions include any down payment,credit of trade-in,or dealer rebate.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.(We're not really sure where the 2,400 comes from,either.) The lease factor the dealer quotes you is 0.00208.The monthly lease payment consists of three parts; a depreciation fee,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,times the money factor,and the monthly sales tax is simply the monthly lease payments times the tax rate.What is your monthly lease payment for a 36-month lease if the sales tax is 7 percent?

A) $329.08
B) $342.63
C) $379.82
D) $402.24
E) $437.54

F) A) and B)
G) C) and D)

Correct Answer

verified

Show Answer

Question 22

Multiple Choice

Review LaterAdd Note

Review Later

Which one of the following correctly states one of the conditions established by the IRS for a lease to be considered valid for tax purposes?

A) The lease should have high payments at the beginning of the lease period and low payments at the end of the lease period.
B) Any renewal option should be based on a value which is less than the fair market value of the asset at the time of renewal.
C) The term of the lease must be less than 80 percent of the economic life of the asset.
D) The lessee should have the option to purchase the asset at a discounted price at the end of the lease term.
E) The lessor must have a reasonable expectation of earning an aftertax profit.

F) A) and D)
G) C) and D)

Correct Answer

verified

Show Answer

Question 23

Multiple Choice

Review LaterAdd Note

Charleston Marina is considering either leasing or buying some new equipment it needs for repairing boats.The lease payments would be $7,200 a year for 3 years.The purchase price is $20,800.The equipment has a 3-year life and then is expected to have a resale value of $4,700.The firm uses straight-line depreciation,borrows money at 8.5 percent,and has a 34 percent tax rate.What is the net advantage to leasing?

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

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 $2 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 $475,000 per year for 4 years.Assume the tax rate is 34 percent.You can borrow at 10 percent before taxes.What is the net advantage to leasing from the lessor's viewpoint?

The Blue Goose is trying to decide whether to lease or buy some new refrigeration equipment for the restaurant.The equipment costs $63,000,has a 7-year life and will be worthless after the 7 years.The cost of borrowed funds is 8.4 percent and the tax rate is 32 percent.The equipment can be leased for $9,800 a year.What is the amount of the annual depreciation tax shield if the firm uses straight-line depreciation?

Heavy Equipment Rentals borrows money on a nonrecourse basis from The Financial Group to fund its purchases of construction equipment such as backhoes,graders,earth movers,etc.This equipment is then leased to contractors.The leases are classified as tax-oriented leases.Which one of the following terms best describes these lease of construction equipment?

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?

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?

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 $1.2 million in annual pretax cost savings.The system costs $6.7 million and will be depreciated straight-line to zero over 4 years.Wildcat's tax rate is 35 percent,and the firm can borrow at 11 percent.Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $1,700,000 per year.Lambert's policy is to require its lessees to make payments at the start of the year.Lambert requires Wildcat to pay a $270,000 security deposit at the inception of the lease.What is the NAL of leasing the equipment?

Explain the differences between purchasing an asset and leasing 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 $2.2 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 $600,000 per year for 4 years.Assume your company does not contemplate paying taxes for the next several years.You can borrow at 6 percent before taxes.What is the net advantage to leasing from your company's standpoint?

A financial lease: I.is generally a fully amortized lease. II.usually requires the lessee to insure the asset. III.is generally cancelable without penalty if the lessee provides 30 days advance notice. IV.is referred to as a capital lease by accountants.

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?

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 $850,000 in annual pretax cost savings.The system costs $8 million and will be depreciated straight-line to zero over 5 years.Wildcat's tax rate is 34 percent,and the firm can borrow at 8 percent.Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for payments of $2,040,000 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?

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?

Daily Enterprises is contemplating the acquisition of some new equipment.The purchase price is $46,000.The company expects to sell the equipment at the end of year 4 for $2,500.The firm uses 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 can be leased for $12,300 a year for 4 years.The firm can borrow money at 7.5 percent and has a 35 percent tax rate.What is the incremental annual cash flow for year 4 if the company decides to lease the equipment rather than purchase it?

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 7 years.Which type of lease does Kate have?

Your firm is considering either leasing or buying some new equipment.The lessor will charge $13,800 a year for 4 years should you decide to lease.The purchase price is $47,800.The equipment has a 4-year life after which it is expected to have a resale value of $8,400.Your firm uses straight-line depreciation,borrows money at 10 percent,and has a 33 percent tax rate.What is the aftertax salvage value of the equipment?

A leveraged lease is a: