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60) You work for a nuclear research laboratory that is contemplating leasing a diagnostic scanner
(leasing is a very common practice with expensive, high-tech equipment). The scanner costs $3.5
million and it would be depreciated straight-line to zero over four years. Because of radiation
contamination, it will actually be completely valueless in four years. You can lease it for
$1,025,000 per year for four years. Assume the tax rate is 22 percent. You can borrow at 7.5
percent before taxes. What is the net advantage to leasing from your company's standpoint?
A) $46,217
B) $49,131
C) $50,776
D) $53,468
E) $54,117
61) A machine costs $2.2 million and would be depreciated straight-line to zero over four years
after which it would be worthless. This machine can be leased for $645,000 per year for four
years. Assume a tax rate of 21 percent and a pretax borrowing rate of 7 percent. What is the net
advantage to leasing from the lessor's viewpoint?
A) −$10,621
B) −$9,988
C) −$4,464
D) −$12,082
E) −$8,840
62) If your firm purchases a machine costing $2 million, it would depreciate that machine
straight-line to zero over four years, after which time the machine would be worthless. Your firm
has a tax rate of 23 percent and borrows funds at 6 percent before taxes. Your firm is also
considering leasing this machine. How much would the lease payment have to be in order for
both the lessor and your firm to be indifferent about leasing?
A) $601,316
B) $521,909
C) $552,200
D) $563,333
E) $576,693
63) Wildcat Oil Company is trying to decide whether to lease or buy a new computer system.
The system would cost $6.7 million that would be depreciated straight-line to zero over its 4-year
life and would provide $1.2 million in annual pretax cost savings. Wildcat's tax rate is 21 percent
and its pretax borrowing cost is 9 percent. Lambert Leasing has offered to lease the system to
Wildcat for payments of $1,850,000 per year for four years. Lambert's requires its lease
payments to be paid at the beginning of each year. Lambert would also require Wildcat to pay a
refundable $270,000 security deposit at the inception of the lease. What is the NAL of leasing
the system?
A) $141,287
B) $157,395
C) $60,318
D) $138,828
E) $134,719
64) An asset costs $640,000 and would be depreciated in a straight-line manner over its 4-year
life. It will have no salvage value. The tax rate is 21 percent and the pretax cost of borrowing is 9
percent. What lease payment on this asset will make the lessee and the lessor equally well off?
A) $185,717
B) $194,141
C) $167,778
D) $197,235
E) $165,026
65) Suppose you are considering leasing a car. The price you and the dealer agree on is $32,000,
which is the base capitalized cost. Other costs added to the capitalized cost price include the
acquisition fee, insurance, and, if elected, the extended warranty. Assume these costs are $390.
Capitalization cost reductions include any down payment, trade-in value, or rebates. Assume you
make a down payment of $2,600, and there is no trade-in or rebate. If you drive 11,000 miles per
year, the lease-end residual value for this car will be $18,700 after three years. The lease factor,
which is the interest rate on the loan, is the APR of the loan divided by 2,400. The lease factor
the dealer quotes you is .00208. The monthly lease payment consists of three parts; a
depreciation charge, a finance fee, and sales tax. The depreciation fee is the net capitalization
cost minus the residual value, divided by the term of the lease. The net capitalization cost is the
cost of the car minus any cost reductions plus any additional costs. The finance fee is the net
capitalization cost plus the residual value, times the money factor, and the monthly sales tax is
the depreciation charge plus the finance fee, times the tax rate. What is your monthly lease
payment for a 36-month lease if the sales tax is 7 percent?
A) $329
B) $343
C) $380
D) $402
E) $438
66) A machine that will be worthless after five years costs $3.2 million. This machine can be
leased for $760,000 per year for five years. Assume the machine, if purchased, would be
depreciated straight-line to zero over its 5-year life. What is the net advantage to leasing this
machine for a company that will pay no taxes over the lease period and has a pretax cost of
borrowing of eight percent?
A) $282,706
B) $165,540
C) $121,409
D) $212,809
E) $228,315
67) A scanner that costs $2.8 million would be depreciated straight-line to zero over four years
and then be worthless. Assume that both a lessor and a lessee have tax rates of 21 percent and
borrow at a pretax rate of 7.5 percent. However, the lessee has operating losses and will not pay
any taxes for at least the next five years. What range of lease payments will allow a lease on this
scanner to be profitable for both parties?
A) $814,026 to $815,123
B) $804,026 to $805,481
C) $835,024 to $835,989
D) $845,123 to $846,417
E) $825,123 to $826,825
68) Turner's has decided to modernize its production facility by acquiring $2.4 million in new
fixed assets that will be depreciated straight-line to zero over five years. This equipment will
have no salvage value but will provide $1,880,000 in annual pretax cost savings. Turner's tax
rate is 21 percent and its pretax cost of debt is 8.6 percent. Thrifty Leasing has offered a 5-year
lease on this equipment with annual payments due at the beginning of each year. What is the
maximum lease payment that would be acceptable to Turner's?
A) $593,231
B) $570,497
C) $404,506
D) $406,318
E) $611,472
69) Southern Mfg. can save $950,000 in annual pretax costs by acquiring $2.6 million of new
equipment that would be depreciated straight-line to zero over four years. Assume the equipment
would have an aftertax residual value of $500,000 at the end of four years. Southern's tax rate is
23 percent and its pretax cost of debt is 9 percent. Lambert Leasing has offered to lease this
equipment in exchange for annual payments which would be payable at the beginning of each
year. What is the maximum lease payment that would be acceptable to Southern Mfg?
A) $612,307
B) $634,515
C) $548,200
D) $651,646
E) $662,937
70) CT Motors borrows money at 8.35 percent, uses straight-line depreciation, and has a tax rate
of 21 percent. The firm's break-even aftertax annual lease payment on a machine is $15,306.
What amount would CT Motors pay to the lessor annually to break-even?
A) $18,992
B) $18,403
C) $17,620
D) $19,914
E) $19,375
71) Frank's Auto can purchase new equipment for $136,000 cash that has a life of four years and
a pretax residual value of $7,000 at the end of Year 4. Frank's uses MACRS depreciation with
rates of 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent for Years 1 to 4,
respectively. Frank's pretax cost of debt is 7.5 percent and its tax rate is 21 percent. However,
Frank's does not expect to owe any taxes for at least five years. The equipment can also be leased
for $38,900 a year. What is the incremental annual cash flow for Year 4 if the company decides
to lease rather than purchase this equipment?
A) −$45,900
B) −$31,900
C) $38,900
D) $45,900
E) $31,900
