Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
32) Which one of the following is probably the best reason for leasing instead of buying?
A) Increased ROA
B) Circumvented expenditure controls
C) One hundred percent financing
D) Tax reduction
E) Increased uncertainty
33) Which of these are offered as key considerations in the lease versus purchase decision
according to the research findings of Smith and Wakeman?
A) Price discrimination opportunities and debt displacement options
B) Cash flows and sensitivity to use and maintenance decisions.
C) Attracting clients with low prices and debt displacement
D) Cash flows and debt displacement
E) Price discrimination opportunities and sensitivity to use and maintenance decisions
34) 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?
A) −$1,325.50
B) −$1,487.40
C) −$1,295.10
D) −$1,380.00
E) −$975.50
35) 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?
A) $6,850.00
B) $9,160.50
C) $7,196.50
D) $7,689.00
E) $8,500.00
36) A lease with a term of 6 years calls for annual payments of $2,100. The leased asset would
cost $9,200 to buy and would be depreciated straightline to a zero salvage value over the 6 years.
The actual salvage value is negligible. The firm can borrow at a rate of 8 percent. What is the
NPV of the lease relative to the purchase if the lessee's tax rate is 21 percent?
A) $410.22
B) −$444.04
C) $444.04
D) −$410.22
E) $399.07
37) Hi-Tek Industries is considering a lease with four annual payments of $4,000 each. The firm
can borrow at a rate of 6.7 percent and has a tax rate of 21 percent. The leased asset would cost
$15,000 to purchase, have a tax life of 4 years, and would be depreciated on a straightline basis
to zero. What would be the incremental cash flow in Year 4 from leasing instead of purchasing if
the purchased asset had a pretax salvage value of $500?
A) −$4,318.10
B) −$3,605.50
C) −$4,211.51
D) −$4,342.50
E) −$3,900.00
38) A new robotic welder can be leased for 3 years with annual payments of $225,000 with the
first payment occurring at lease inception. The system would cost $850,000 to buy and would be
depreciated straightline to a zero salvage value over five years. The actual salvage value is
expected to be $65,000 at the end of the five years. The firm can borrow at 8 percent and has a
tax rate of 21 percent. What is the Year 0 incremental cash flow from leasing instead of buying?
A) $1,027,750
B) $695,000
C) $672,250
D) $748,500
E) $684,750
39) 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?
A) −$4,224
B) −$3,198
C) −$6,946
D) −$7,250
E) −$6,880
40) A lease has a term of 3 years and annual payments of $25,000. The leased asset would cost
$74,000 to buy and would be depreciated straightline to a zero salvage value over 3 years. The
actual salvage value is negligible. The lessee can borrow at a rate of 12 percent and has a tax rate
of 21 percent. What is the incremental cash flow of purchasing instead of leasing for Year 3 from
the lessee's perspective?
A) −$16,250
B) −$24,930
C) $24,930
D) $16,250
E) −$19,750
41) A lessor can borrow at a rate of 7 percent and has a tax rate of 21 percent. The lessee can
borrow at a rate of 8 percent and has a tax rate of 21 percent. Assume an asset costs $138,000
and can be leased in exchange for two annual payments of $70,000 with the first payment due at
the time of signing. What is the incremental cash flow at Time 0 for the lessee for a purchase
instead of a lease?
A) −$92,500
B) $138,000
C) $92,500
D) −$82,700
E) −$138,000
42) The Button Company is considering the purchase of a new machine for $30,000 that has a
life of 5 years and would be depreciated on a straightline basis to a zero salvage value over its
life. The machine is expected to save the firm $12,500 per year in operating costs. There is no
actual salvage value. Alternatively, the firm can lease the machine for $7,300 annually for 5
years, with the first payment due at the end of the first year. The firm's tax rate is 21 percent and
its cost of debt is 10 percent. What is the net advantage to leasing for the lessee?
A) −$1,134.40
B) $1,602.15
C) $1,869.12
D) −$1,408.16
E) $1,577.10
43) A new robotic welder can be leased for 5 years with annual payments of $300,000 with the
first payment occurring at lease inception. The system would cost $1,050,000 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 23 percent. What discount rate should be used for
valuing the lease?
A) 8.00 percent
B) 6.16 percent
C) 6.32 percent
D) 9.84 percent
E) 19.72 percent
44) A machine that costs $280,000 would be depreciated using the straightline method by a
leasing firm over a period of 3 years. Both the book value and the market value would be zero at
the end of the 3 years. Both the lessor and the lessee have a tax rate of 21 percent. What is the
NPV of the lease relative to the purchase to the lessor if the applicable pretax cost of borrowing
is 7 percent and the lease payments are set at $102,100 annually for 3 years?
A) −$1,025.58
B) −$9,658.92
C) $411.67
D) $882.09
E) $0
45) 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?
A) −$31,800.89
B) −$29,504.10
C) $32,149.05
D) −$30,690.00
E) $29,504.10
46) All-Tek 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 does
not expect to owe any taxes for the next several years. What is the maximum lease payment All-
Tek would be willing to pay?
A) $24,840.00
B) $23,000.00
C) $18,842.56
D) $28,802.49
E) $21,780.30
47) 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?
A) $24,840.00
B) $29,908.16
C) $27,538.67
D) $23,708.03
E) $28,802.49
48) Al-Tek is considering leasing some new equipment for 5 years with annual payments. 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 applicable pretax borrowing rate is 8 percent. The
lessee does not expect to owe taxes for several years. The lessor's tax rate is 21 percent. What is
the minimum lease payment that will be acceptable to both parties?
A) $28,603.33
B) $28,745.16
C) $27,750.00
D) $22,708.67
E) $26,709.12
49) 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?
A) $22,333.33
B) $21,970.82
C) $20,416.67
D) $22,802.49
E) $21,511.18
50) 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.
51) Discuss some of the pros and cons of leasing.
52) Explain the characteristics of both operating and financial leases.
53) Explain the term "bargain purchase price option" and identify at least one application of that
term.
