44) A firm can either lease or buy some equipment costing $72,900. The lease payments would
be $18,500 a year for four years. The equipment has a 4-year life after which it is expected to
have a resale value of $3,600. The firm uses straight-line depreciation over the life of the asset,
borrows money at 11 percent, and has a tax rate of 21 percent. The company does not expect to
owe any taxes for at least four years because of its operating losses. What is the incremental cash
flow for Year 3 if the company decides to lease rather than purchase the equipment?
A) −$29,165
B) −$21,821
C) −$18,500
D) −$18,559
E) −$17,635
45) Rosewood Furniture is considering purchasing equipment costing $69,000 which it expects
to sell at the end of Year 4 for $22,500. The firm uses MACRS depreciation with rates of 33.33
percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4, respectively. The
equipment can be leased for $18,800 a year for four years. The firm can borrow at 7.5 percent
and has a tax rate of 21 percent. What is the incremental annual cash flow for Year 4 if the
company decides to lease the equipment rather than purchase it?
A) −$50,430
B) −$42,730
C) −$33,701
D) −$32,930
E) −$50,684
46) Steven’s Auto is trying to decide whether to lease or buy some new equipment costing
$23,000 that has a life of three years, after which it will be worthless. The aftertax discount rate
is 5.8 percent. Assume the annual depreciation tax shield is $1,610 and the aftertax annual lease
payment is $6,500. What is the net advantage to leasing?
A) $1,241
B) −$397
C) $1,585
D) $1,315
E) −$863
47) Pressley’s Inc. can purchase some equipment for $620,000 that has a life of four years, after
which it will be worthless. The pretax cost of borrowed funds is 7.8 percent and the corporate tax
rate is 21 percent. The firm expects significant operating losses for at least the next five years
and thus expects to pay no taxes during this period. The equipment can be leased for $182,000 a
year. What is the net advantage to leasing?
A) $14,500
B) −$3,431
C) $13,754
D) $20,628
E) −$7,967
48) CTS is analyzing the acquisition of $284,000 equipment that would be depreciated using the
MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent over Years 1 to 4,
respectively. After that time, the equipment would be worthless. The equipment can be leased for
$82,100 a year for four years. The firm can borrow at 6 percent and has a tax rate of 23 percent.
What is the net advantage to leasing?
A) –$1,982
B) –$607
C) $11
D) −$1,847
E) −$2,050
49) National Rail can purchase equipment for $386,000 that would be depreciated using the
MACRS rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent for Years 1 to 4,
respectively. The equipment will be worthless after four years. The equipment can be leased for
four years at $110,500 a year. The firm can borrow at 8 percent and has a tax rate of 21 percent.
What is the net advantage to leasing?
A) $11,789
B) $10,862
C) $13,742
D) $12,087
E) $10,127
50) Do-Rite Construction is evaluating the lease versus the purchase of a machine costing
$168,000 that would be depreciated using MACRS over a four-year period, after which the
machine would be worthless. MACRS rates are 33.33 percent, 44.44 percent, 14.82 percent, and
7.41 percent for Years 1 to 4, respectively. The machine could be leased for $46,500 a year for
four years. The firm can borrow at 8.5 percent and has a tax rate of 21 percent. However, the
firm does not expect to pay any taxes for the next five years. What is the net advantage to
leasing?
A) −$4,502
B) $15,685
C) $18,640
D) −$1,651
E) $3,277
51) The Box Store is considering the purchase of a delivery truck costing $49,000. The truck can
be leased for three years at $19,500 per year or it can be purchased at an interest rate of 7.5
percent. The estimated life of the truck is three years. The corporate tax rate is 21 percent. The
company does not expect to owe any taxes for the next several years due to large operating
losses. The firm uses straight-line depreciation. What is the net advantage to leasing?
A) –$1,710
B) –$864
C) $1,304
D) −$1,006
E) $1,794
52) Cayman Productions is considering either leasing or buying some equipment. The lessor will
charge $26,900 a year for a three-year lease. The purchase price is $72,600. The equipment has a
three-year life after which time it will be worthless. The firm uses straight-line depreciation,
borrows money at 8 percent, and expects sufficient losses to offset any taxes which otherwise
might be owed for the next four years. What is the net advantage to leasing?
A) −$3,395
B) −$1,299
C) $3,276
D) $1,344
E) $2,858
53) A lessor will charge $30,500 a year for a five-year lease on equipment costing $136,000. The
equipment has a 5-year life after which time it will be worthless. The lessee uses straight-line
depreciation, has a tax rate of 21 percent, and borrows money at 8 percent. What is the net
advantage to leasing?
A) $10,574
B) $5,507
C) $12,638
D) $6,283
E) $11,528
54) Cool Treats is considering either leasing or buying a new $30,900 freezer unit. The lessor
will charge $11,900 a year for a two-year lease. The freezer has a two-year life after which time
it is expected to have a resale value of $11,500. Cool Treats uses straight-line depreciation,
borrows money at 7.5 percent, and has sufficient operating losses to offset any potential taxable
income the firm might have over the next four years. What is the net advantage to leasing?
A) −$167
B) $238
C) $258
D) −$270
E) −$419
55) Williams’ Paints is weighing a lease versus a purchase of $312,000 of fixed assets. The assets
would be depreciated to zero over their 4-year life after which time they can be sold for an
estimated $76,000. The firm uses straight-line depreciation and can borrow at 8 percent. The
equipment can be leased for $66,000 a year for four years. The firm does not expect to owe any
taxes for the next five years because of its operating losses. What is the net advantage to leasing?
A) $9,841
B) $11,904
C) $24,922
D) $28,208
E) $37,537
56) Pizza Shoppes is considering either leasing or buying a new $24,000 oven. The lease
payments would be $8,700 a year for three years. The oven would be depreciated on a straight-
line basis over a three-year life and then be resold for $5,500. The firm borrows at 7 percent and
has a tax rate of 21 percent. What is the net advantage to leasing?
A) –$2,809
B) –$1,833
C) −$2,084
D) −$2,760
E) −$1,899
57) A lessor will charge $13,800 a year for four years as lease payments on $47,800 of
equipment. The equipment has a life of four years after which it should resell for $8,400. Your
firm uses straight-line depreciation, borrows at 10 percent, and has a tax rate of 25 percent. What
is the amount of the Year 4 cash flows when computing the NAL?
A) −$16,650
B) −$19,638
C) −$21,738
D) −$15,748
E) −$17,038
58) The lease payments on $19,900 of equipment would be $3,800 a year. The equipment has a
life of six years after which it is expected to have a resale value of $2,100. Assume a lessee uses
straight-line depreciation, borrows at 11.5 percent, and has a tax rate of 23 percent. What amount
should be included in the Year 6 cash flows when that firm computes the NAL?
A) −$5,306
B) −$6,234
C) −$4,471
D) −$4,407
E) −$5,512
59) Ft. Myers Marina can lease $31,800 of equipment for $7,200 a year for five years. If
purchased, the equipment would be depreciated over its 5-year life and then have a resale value
of $5,900. The firm uses straight-line depreciation, borrows at 8 percent, and has a tax rate of 21
percent. What is the net advantage to leasing?
A) −$851
B) −$1,022
C) −$961
D) −$808
E) −$1,211