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Exam 27: Leasing

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Question 31

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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?

A) $2,880
B) $4,300
C) $7,500
D) $8,333
E) $9,000

F) C) and D)
G) B) and E)

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Question 32

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Interstate Services needs some equipment costing $61,000.The equipment has a 4-year life after which it will be worthless.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 $16,000 a year.The firm can borrow money at 7.5 percent and has a 36 percent tax rate.What is the incremental annual cash flow for year 2 if the company decides to lease the equipment rather than purchase it?

A) -$18,897
B) -$19,286
C) -$19,389
D) -$19,407
E) -$19,999

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

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Question 33

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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?

Northern Lights is trying to decide whether to lease or buy some new equipment.The equipment costs $54,000,has a 5-year life,and will be worthless after the 5 years.The company has a tax rate of 34 percent,a cost of borrowed funds of 8.75 percent,and uses straight-line depreciation.The equipment can be leased for $14,100 a year.What is the amount of the annual depreciation tax shield?

The IRS will disallow any lease that:

Which of the following apply to the lessee of a sale and leaseback arrangement? I.may have option to purchase asset at end of lease term II.receives cash from the sale of the asset III.maintains ownership rights IV.uses the asset

Deep Mining,Inc.,is contemplating the acquisition of some new equipment for controlling coal dust that costs $174,000.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.After that time,the equipment will be worthless.The equipment can be leased for $53,100 a year for 4 years.The firm can borrow money at 11.5 percent and has a 36 percent tax rate.What is the net advantage to leasing?

A financial lease:

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.Assume the tax rate is 33 percent.You can borrow at 6 percent before taxes.How much would the lease payment have to be in order for both the lessor and the lessee to be indifferent about the lease?

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?

In a direct lease,the lessor: I.is the end user of the asset. II.rents the leased asset from the manufacturer. III.owns the asset. IV.is generally an independent leasing company.

Which one of the following will classify a lease as a capital lease for accounting purposes?

Bob's Pizza is considering either leasing or buying a new oven.The lease payments would be $10,200 a year for 3 years.The purchase price is $29,000.The equipment has a 3-year life and then is expected to have a resale value of $3,100.Bob's Pizza uses straight-line depreciation,borrows money at 10 percent,and has a 32 percent tax rate.What is the net advantage to leasing?

Precision Tool is trying to decide whether to lease or buy some new equipment for its tool and die operations.The equipment costs $1.2 million has a 7-year life,and will be worthless after the 7 years.The pre-tax cost of borrowed funds is 8 percent and the tax rate is 32 percent.The equipment can be leased for $242,500 a year.What is the net advantage to leasing?

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

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?

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

Baxter Contractors is evaluating the lease versus the purchase of a $329,000 machine.The machine will be depreciated using MACRS over a 4-year period,after which the machine will be worthless.MACRS allows for 33.33 percent,44.44 percent,14.82 percent,and 7.41 percent depreciation over years 1 to 4,respectively.The machine could be leased for $105,000 a year for 4 years.The firm can borrow money at 9.5 percent and has a 35 percent tax rate.The firm does not expect to pay any taxes for the next 5 years.What is the net advantage to leasing?

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