Simpson is considering leasing a $500,000 equipment.Four annual payments of $150,000 are required at the end of each year.Simpson's required rate of return is 6% and has a 40% tax rate.The asset is in the 25% CCA class.The half year rule applies and CCA is taken in year 0.After the fourth year, the asset becomes worthless.Determine the NPV of the lease. \[\begin{array}{l} \begin{array} { | l | r | } \hline \text { DATA: }\\ \hline \text { Equipment value } & 500,000 \\ \hline \text { Lease payments } & 150,000 \\ \hline \text { Number of lease payments } & 4 \\ \hline \text { Tax rate } & 40 \% \\ \hline \text { CCA rate } & 25 \% \\ \hline \text { Rate of interest } & 6.00 \% \\ \hline \text { After tax rate of interest } & 3.60 \% \\ \hline \end{array} \end{array}\]

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Exam 17: Leasing

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Simpson is considering leasing a $500,000 equipment.Four annual payments of $150,000 are required at the end of each year.Simpson's required rate of return is 6% and has a 40% tax rate.The asset is in the 25% CCA class.The half year rule applies and CCA is taken in year 0.After the fourth year, the asset becomes worthless.Determine the NPV of the lease. DATA: Equipment value 500,000 Lease payments 150,000 Number of lease payments 4 Tax rate 40\% CCA rate 25\% Rate of interest 6.00\% After tax rate of interest 3.60\%

(Essay)

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Question 101

A sensible, not dubious, reason for a lease would revolve around preserving capital through leasing rather than putting up the full price through owning.

(True/False)

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Question 102

A lessor and lessee are most able to maximize their financial communities of interest through a lease contract if the lessor's tax rate is very high and the lessee's very low.Explain how this would be true, and the implications for the type of firms who lease their assets and the type of companies who operate as lessors.

(Essay)

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Question 103

A sale and leaseback arrangement transfers ownership from a user to a lessor who then leases the asset back to the former owner.

(True/False)

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Question 104

If the asset described in above Question had a CCA rate of 30%, with the usual half-year rule, and were leased for 5 years, how would the lessee treat the five years of CCA? The lessee tax rate is 40%.The asset class uses declining balance.

(Multiple Choice)

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Question 105

If an asset had a $20,000 salvage value at the end of the lease and the asset is sold, it would make no cash flow difference whether the asset pool were terminated or remained open.

(True/False)

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Question 106

All of the following must be included on a company's balance sheet except:

(Multiple Choice)

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Question 107

Because salvage value is a more risky estimate than others in lease analysis, one might do one of the following:

(Multiple Choice)

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Question 108

A financial lease has the following characteristics: Asset cost: $10,000; tax rate: 30%; CCA rate: 20%; after-tax cost of capital: 15%, lease term: 4 years, with $2,500 annual lease payments and tax shields in advance, and salvage and UCC tax shields in Year 4.Salvage is zero.The asset is part of a large pool.What important timing considerations should an analyst watch for in this analysis? What is its present value?

(Essay)

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Question 109

The most important issue that makes it possible for both a lessor and lessee to gain from a financial lease arrangement is (aside from risk):

(Multiple Choice)

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Question 110

Generally, equivalent annual cost analyses show that the longer you need an asset, the more likely it is that it is cheaper to buy rather than lease an asset.

(True/False)

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Question 111

When one capitalizes a lease, one finds the nominal total of all future lease payments and records them as a liability on right hand side of the balance sheet.

(True/False)

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Question 112

Describe how risk plays a role in financial lease analysis, particularly in discount rates, salvage values, maintenance costs and insolvency circumstances.

(Essay)

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Question 113

Off-balance sheet financing implies that:

(Multiple Choice)

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Question 114

Showing 101 - 114 of 114

A sensible, not dubious, reason for a lease would revolve around preserving capital through leasing rather than putting up the full price through owning.

A sale and leaseback arrangement transfers ownership from a user to a lessor who then leases the asset back to the former owner.

If the asset described in above Question had a CCA rate of 30%, with the usual half-year rule, and were leased for 5 years, how would the lessee treat the five years of CCA? The lessee tax rate is 40%.The asset class uses declining balance.

If an asset had a $20,000 salvage value at the end of the lease and the asset is sold, it would make no cash flow difference whether the asset pool were terminated or remained open.

All of the following must be included on a company's balance sheet except:

Because salvage value is a more risky estimate than others in lease analysis, one might do one of the following:

The most important issue that makes it possible for both a lessor and lessee to gain from a financial lease arrangement is (aside from risk):

Generally, equivalent annual cost analyses show that the longer you need an asset, the more likely it is that it is cheaper to buy rather than lease an asset.

When one capitalizes a lease, one finds the nominal total of all future lease payments and records them as a liability on right hand side of the balance sheet.

Describe how risk plays a role in financial lease analysis, particularly in discount rates, salvage values, maintenance costs and insolvency circumstances.

Off-balance sheet financing implies that:

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