Exam 21: Leasing

Nu-Tek is considering leasing some equipment for 4 years with equal annual lease payments.The equipment would cost $74,000 to buy and would be depreciated straightline over 4 years to a zero salvage value.The actual salvage value is zero.The applicable pretax borrowing rate is 7.3 percent.The lessee does not expect to owe taxes for several years while the lessor's tax rate is 21 percent.What is the minimum lease payment that will be acceptable to both parties?

In the presence of corporate taxes,riskless cash flows should be discounted at the:

Explain the term "bargain purchase price option" and identify at least one application of that term.

Explain the characteristics of both operating and financial leases.

Artisan's is considering leasing a new computer.The lease terms include five annual payments of $1,650 with the first payment occurring at the lease signing.The computer would cost $8,500 to buy and would be depreciated straightline to a zero salvage value over 5 years.The firm can borrow at a rate of 7.5 percent and has a tax rate of 21 percent.What is the cash flow from leasing relative to purchasing in Year 0?

Blasco's wishes to obtain new assets that will reduce their operating costs by $3,800 a year on an aftertax basis.These assets can be either purchased or leased.Explain why these cost savings are omitted from the lease versus purchase analysis.

For accounting purposes,which one of the following conditions would automatically cause a lease to be classified as a capital lease?

Discuss some of the pros and cons of leasing.

A financial lease has which one of the following characteristics?

If the lessor borrows the majority of the purchase price of a leased asset,the lease is called a:

FAS 13 sets forth four criteria for determining whether or not a lease must be classified as a capital lease.How many of these criteria must be met for capital lease classification?

A lease has a term of 5 years with annual payments of $6,400.The asset would cost $45,000 to buy and would be depreciated straightline to a zero salvage value over 5 years.The actual salvage value is zero.If the firm has a tax rate of 21 percent,what is the incremental cash flow in Year 5 of leasing rather than purchasing?

If a lease term is 35 years the IRS will classify the lease as a:

HiTek is considering leasing some new equipment for 5 years with annual payments of $27,500.The equipment would cost $115,000 to buy and would be depreciated straightline to a zero salvage value.The actual salvage value is zero.The firm can borrow at 8 percent and has a tax rate of 21 percent.What is the maximum lease payment HiTek would be willing to pay?

Assume that both the lessor and the lessee have the same interest and tax rates and there are no transaction costs.Given this,the best lease agreement results in:

One key reason why the IRS is concerned about the structure of lease contracts is because:

A lease has five annual payments of $115,000.The leased asset would cost $500,000 to buy,would be depreciated straightline to a zero salvage value over 5 years,and has an actual salvage value of zero.The firm can borrow at 8 percent on a pretax basis and has a tax rate of 23 percent.What is the net advantage of leasing?

Which one of these statements is false?

Which one of these can be ignored when valuing a purchase versus a lease?

Artisan's is considering leasing a new computer.The lease terms include five annual payments of $1,500 with the first payment occurring when the lease is signed.The computer would cost $7,200 to buy and would be depreciated straightline to a zero salvage value over 5 years.The actual salvage value is negligible because of technological obsolescence.The firm can borrow at a rate of 8 percent and has a tax rate of 21 percent.What is the cash flow from leasing relative to purchasing in Year 3?