Exam 17: Leasing

The salvage value of a leased asset affects the cost of the lease through the tax shields associated with owning.

Following the time sequence described in Table 17.1,,what would the present value of cash flows be for leasing this $800,000 asset if the lessee's before tax cost of capital were 15% and the lease payments of the assets were $210,000? The tax rate is 40% and CCA = 30%.Note that the asset is scrapped and alone in its pool at the time of disposition.The assest is scrapped in 4 years.

If a machine costs $50,000,and $5,000 a year for the lessor to maintain and insure,what equivalent annual cost would serve as the basis of a full-service lease payment for a six-year operating lease,paid in arrears,if the lessor's cost of capital is 8%?

If a financial lease analysis shows a positive result,which one of the following is true?

As a practical matter,the lessee uses a single discount rate for lease analysis,but a more refined approach would do which of the following?

Lease analysis is affected by assumptions about the asset pool in which the leased asset is kept.Explain how the results of such analysis would be different if the asset was alone or if many assets in it pool at the end of a lease contract.Consider the situation where the tax rate is 40%,CCA = 30% and the discount rate were 10%,and the difference between UCC and salvage were $10,000.

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 the lease payment for the machine in Question above were made in advance,starting at the beginning of the first year of the contract,what would the size of such a payment now be as an equivalent annual cost?

Financial leases cover the entire economic life of the asset and are not cancellable.

Provide a critique of two weak or dubious reasons for leasing.

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.

Which of the following statements is not true of a financial lease?

Which one of the following is not a cash flow item in financial lease analysis?

The lessee in a financial lease bears the most of the same risks and rewards as ownership except:

If a lease analysis shows exactly the same present value as an equivalent loan,the lessee should:

If a lessor paid $800,000 for an asset,how would the lessee treat this amount in his financial lease analysis?

A lessor and lessee have the same exposure to financial risk.

In a direct lease arrangement:

CumChan is a financial services firm.They need computer equipment and have decided to lease the equipment with an operating lease.They want to prevent additional debt from showing up on their balance sheet.Which of the following must be true about their lease for this to work?

You are the CFO of a company.You are considering leasing photocopiers from the manufacturer instead of purchasing them for $200,000.You can borrow at after-tax interest of 9% and the corporate tax rate is 35%.The lease payment will be $50,000 for five years.At the end of the five years,the photocopiers will be worthless.Photocopiers are depreciated at 20% CCA rate.What is the NPV of the lease?