Which one of the following correctly states one of the conditions established by the IRS
for a lease to be considered valid for tax purposes?
A. The lease should have high payments at the beginning of the lease period and low
payments at the end of the lease period.
B. Any renewal option should be based on a value which is less than the fair market
value of the asset at the time of renewal.
C. The term of the lease must be less than 80 percent of the economic life of the asset.
D. The lessee should have the option to purchase the asset at a discounted price at the
end of the lease term.
E. The lessor must have a reasonable expectation of earning an aftertax profit.
Douglass Interiors is considering two mutually exclusive projects and have determined
that the crossover rate for these projects is 11.7 percent. Project A has an internal rate of
return (IRR) of 15.3 percent and Project B has an IRR of 16.5 percent. Given this
information, which one of the following statements is correct?
A. Project A should be accepted as its IRR is closer to the crossover point than is
Project B's IRR.
B. Project B should be accepted as it has the higher IRR.
C. Both projects should be accepted as both of the project's IRRs exceed the crossover
D. Neither project should be accepted since both of the project's IRRs exceed the