Exam 25: Leasing

If the after-tax present value of buying equipment and using it for six years is $100,000, calculate the break-even after-tax yearly lease payment (seven payments)using a 7 percent real discount rate. (Assume that lease payments are made at the beginning of the year and zero inflation.)

A short-term, cancelable lease is known as a financial lease. A long-term, noncancelable lease is called an operating lease.

The IRS can modify the tax code to alter the attractiveness of leases.

A computer costs $500,000 and is depreciated for tax purposes straight-line over years 1 through 5. Assume that it has zero salvage value at the end of five years. The user wishes to lease the computer by making six annual lease payments, the first of which is due immediately. If taxes are paid without delay and the rate of interest is 10%, what is the minimum acceptable lease payment for a lessor who pays tax at 21%?

What is the discount rate used for lease or buy analysis?

If annual lease payments for a firm are $26,000, calculate the after-tax lease payments, given that the marginal tax rate is 35 percent.

Under a leveraged lease, the lessee borrows money and then uses these funds to make the lease payments.

A lease payment can be thought of as

Which of the following statements is not true? I.The lessee does not have to buy the equipment. II.The lessee is responsible for making the lease payments. III.Lease payments are not tax-deductible. IV.The lessee may give up the depreciation tax shield.

Financial leases are evaluated by discounting lease cash flows at the company's WACC.

The following are sensible reasons for leasing: I.Maintenance is provided. II.There is affirmation of lease cash flows during bankruptcy. III.Leasing avoids capital expenditure controls. IV.Short-term leases are convenient.

You have shopped for a new car, and the best purchase price you can get is $15,000. You have been offered a lease with 36 month-end payments of $249 and a residual value of $7,500. The interest rate that the bank would charge you to borrow money is 9 percent (APR). What is the NPV of the lease arrangement? (Ignore taxes.)

Sale and lease-back arrangements are prevalent in

A lessee in financial distress may be able to renegotiate the lease and force the lessor to accept lower lease payments.