Chapter 27 - Leasing

Chapter 27 - Leasing
Chapter 27
Leasing

Multiple Choice Questions

1. Ron leases a car from Uptown Motors and pays $225 a month as a lease payment. hich
one of the following terms applies to Ron!
". lessee
#. lessor
C. g$arantor
%. tr$stee
&. manager

2. 'he party who owns a leased asset is called the(
". lessee.
#. lessor.
C. g$arantor.
%. tr$stee.
&. manager.

). *ate is leasing some e+$ipment from ",a- Leasing for a period of one-year. ",a- pays the
maintenance. ta-es. and ins$rance costs for this e+$ipment. 'he life of the e+$ipment is 7
years. hich type of lease does *ate ha/e!
". open
#. straight
C. operating
%. financial
&. ta--oriented

27-1
0. "lfredo has a non-cancela1le. fi/e year lease on an ind$strial-grade sewing machine for
stitching $pholstery. 2or acco$nting p$rposes. this is considered to 1e a capital lease. 'he life
of the sewing machine is fi/e years. "lfredo m$st pay all ta-es and ins$rances related to this
lease. hich type of lease does "lfredo ha/e on this sewing machine!
". open
#. straight
C. operating
%. financial
&. ta--oriented

5. " financial lease in which the lessor is the owner for ta- p$rposes is called a3n4 55555
lease.
". open
#. straight
C. operating
%. ta--oriented
&. ta--e-empt

6. 7ea/y &+$ipment Rentals 1orrows money on a nonreco$rse 1asis from 'he 2inancial
8ro$p to f$nd its p$rchases of constr$ction e+$ipment s$ch as 1ac9hoes. graders. earth
mo/ers. etc. 'his e+$ipment is then leased to contractors. 'he leases are classified as ta--
oriented leases. hich one of the following terms 1est descri1es these lease of constr$ction
e+$ipment!
". le/eraged lease
#. sale and lease1ac9 arrangement
C. operating lease
%. perpet$al lease
&. straight lease

7. #rentwood :nd$stries is selling its tool and die e+$ipment to Upward 2inancial and then
leasing that e+$ipment from Upward for a period of ten years. which is the $sef$l remaining
life of the e+$ipment. hich type of lease arrangement is this!
". le/eraged lease
#. sale and lease1ac9
C. operating lease
%. ta--oriented lease
&. straight lease

27-2
;. <o$ are comparing a lease to a p$rchase. 'he =>? associated with this analysis is referred
to as the(
". open interest net present /al$e.
#. depreciated net present /al$e.
C. net ad/antage to leasing.
%. profita1ility inde-.
&. net /al$e of p$rchasing.

@. hich one of the following statements is correct concerning the lease /ers$s 1$y decision!
". 'he lessor is primarily concerned with ret$rning the asset at the end of the lease term
witho$t inc$rring any additional charges.
#. 'he lessor is primarily concerned a1o$t the $se of the asset.
C. :f %ell Comp$ter 1ecame a lessor of its own comp$ters it wo$ld 1e engaging in direct
leasing.
%. " firm sho$ld always p$rchase. rather than lease. any asset that has a pro,ected positi/e
sal/age /al$e at the end of the rele/ant period of $se.
&. Lessors pro/ide a so$rce of financing for lessees.

1A. :n a direct lease. the lessor(
:. is the end $ser of the asset.
::. rents the leased asset from the man$fact$rer.
:::. owns the asset.
:?. is generally an independent leasing company.
". :: and ::: only
#. : and :? only
C. ::: and :? only
%. ::. :::. and :? only
&. :. ::. :::. and :?

27-)
11. "n operating lease has which of the following characteristics!
:. lessee has responsi1ility for the maintenance and ins$rance
::. lease payments co/er the f$ll cost of the asset
:::. economic life of the asset e-ceeds the lease term
:?. lessee can cancel the lease prior to the e-piration date
". : and ::: only
#. :: and :? only
C. : and :: only
%. ::: and :? only
&. :. ::. and ::: only

12. " financial lease(
". is generally called a capital lease 1y acco$ntants.
#. re+$ires the lessor to maintain the asset.
C. is a partially amortiBed lease.
%. is often called a single net lease.
&. can generally 1e cancelled witho$t penalty.

1). " le/eraged lease is a(
". lease where the lessee is the owner of the asset for ta- p$rposes.
#. sale and lease1ac9 arrangement.
C. type of operating lease.
%. lease paid with money 1orrowed 1y the lessee.
&. lease where the lessor 1orrows on a nonreco$rse 1asis.

10. hich of the following apply to the lessee of a sale and lease1ac9 arrangement!
:. may ha/e option to p$rchase asset at end of lease term
::. recei/es cash from the sale of the asset
:::. maintains ownership rights
:?. $ses the asset
". : and :? only
#. :: and ::: only
C. :. ::. and :? only
%. ::. :::. and :? only
&. :. ::. :::. and :?

27-0
15. " firm that is /ery cyclical in nat$re and re+$ires e-tra e+$ipment only d$ring its pea9
periods sho$ld consider leasing that e+$ipment $sing a3n4 55555 lease.
". operating
#. ta--oriented
C. sale and 1$y1ac9
%. le/eraged
&. financial

:. is generally a f$lly amortiBed lease.
::. $s$ally re+$ires the lessee to ins$re the asset.
:::. is generally cancela1le witho$t penalty if the lessee pro/ides )A days ad/ance notice.
:?. is referred to as a capital lease 1y acco$ntants.
". : and ::: only
#. :: and :? only
C. : and :: only
%. ::. :::. and :? only
&. :. ::. and :? only

17. :f a firm does not e-pect to owe ta-es for a few years and needs some e+$ipment. the firm
sho$ld(
". lease the e+$ipment and retain the ta- 1enefits.
#. lease the e+$ipment with the lessor retaining the ta- ownership of the asset.
C. 1orrow the money to 1$y the asset and then depreciate it $sing M"CRC depreciation.
%. 1$y the e+$ipment with cash and depreciate it $sing M"CRC.
&. 1$y the e+$ipment and depreciate it straight-line o/er the life of the asset.

1;. :f a lessor 1orrows money on a nonreco$rse 1asis to p$rchase an asset that will 1e leased
to another party. then(
". the lessor is responsi1le for the payments on the 1orrowed f$nds whether or not the lessee
pays the lease payments.
#. the lessee m$st pay 1oth the lease payment and the loan payment.
C. the loan is considered paid in f$ll if the lessee discontin$es ma9ing the lease payments or
terminates the lease early.
%. the lessor is only o1ligated to ma9e loan payments as long as the lessor is collecting the
lease payments.
&. the lessor m$st p$rs$e the lessee if the lessee fails to ma9e the agreed $pon lease payments.

27-5
1@. :f a firm enters a sale and lease1ac9 agreement. then(
:. the lessee will 1enefit from an immediate cash inflow.
::. 1oth the lessor and the lessee may 1enefit if the lessor can 1enefit more from the ta-
1enefits of ownership than can the lessee.
:::. the lease a$tomatically 1ecomes a nonreco$rse lease.
:?. the lessee forfeits the right to rep$rchase the asset at a later date.
". : and ::: only
#. :: and :? only
C. : and :: only
%. :: and ::: only
&. ::: and :? only

2A. "n operating lease(
". is recorded at its net present /al$e on the 1alance sheet.
#. is recorded on the 1alance sheet as 1oth an asset and a lia1ility.
C. is recorded at its estimated resid$al 1alance on the 1alance sheet.
%. is reflected in the footnotes rather than on the 1alance sheet.
&. does not appear either on a financial statement or in the footnotes.

21. hich one of the following will classify a lease as a capital lease for acco$nting
p$rposes!
". 'he lease transfers ownership of the asset to the lessee 1y the end of the lease.
#. 'he lease term is 75 percent or less of the estimated economic life of the asset.
C. 'he lessee can 1$y the asset at fair mar9et /al$e at the end of the lease.
%. 'he initial present /al$e of the lease payments e+$als or e-ceeds ;A percent of the fair
mar9et /al$e of the asset.
&. 'he total of the lease payments e-ceeds $1AA.AAA.

22. " capital lease is recorded as an asset on the 1alance sheet in an amo$nt e+$al to(
". the dollar amo$nt of each lease payment m$ltiplied 1y the total n$m1er of lease payments
in the original agreement.
#. the dollar amo$nt of each lease payment m$ltiplied 1y the n$m1er of lease payments
remaining.
C. the dollar amo$nt of each lease payment m$ltiplied 1y the n$m1er of lease payments per
year.
%. the lesser of the present /al$e of the remaining lease payments or the cost of the asset.
&. the f$t$re /al$e of the lease agreement at the time the agreement was made.

27-6
2). hich one of the following correctly states one of the conditions esta1lished 1y the :RC
for a lease to 1e considered /alid for ta- p$rposes!
". 'he lease sho$ld ha/e high payments at the 1eginning of the lease period and low
payments at the end of the lease period.
#. "ny renewal option sho$ld 1e 1ased on a /al$e which is less than the fair mar9et /al$e of
the asset at the time of renewal.
C. 'he term of the lease m$st 1e less than ;A percent of the economic life of the asset.
%. 'he lessee sho$ld ha/e the option to p$rchase the asset at a disco$nted price at the end of
the lease term.
&. 'he lessor m$st ha/e a reasona1le e-pectation of earning an afterta- profit.

20. 'he :RC will disallow any lease that(
". has a lease term in e-cess of three years.
#. has a term that is less than one-half of the economic life of the asset.
C. in/ol/es a lessee that has net operating losses.
%. appears to e-ist solely to defer ta-es.
&. red$ces the com1ined ta- o1ligations of the lessor and the lessee.

25. 'he incremental cash flows of leasing consider which of the following!
:. cost of the asset
::. lease payment amo$nt
:::. applica1le ta- rate
:?. ann$al depreciation e-pense
". : and ::: only
#. :: and :? only
C. ::. :::. and :? only
%. :. ::. and :? only
&. :. ::. :::. and :?

26. 'he rele/ant disco$nt rate for e/al$ating a lease is the firmDs(
". cost of e+$ity financing.
#. pre-ta- cost of 1orrowing.
C. afterta- cost of 1orrowing.
%. cost of wor9ing capital.
&. rate of ret$rn on short-term assets.

27-7
27. hich one of the following statements is correct concerning ta-es and leasing!
". 'a--deferral is a legitimate reason for leasing.
#. 'he lessee sho$ld 1e the party with the higher ta- 1rac9et.
C. 8enerally spea9ing. lessors tend to 1enefit from leases while lessees do not.
%. :f a firm has significant net operating losses. it sho$ld 1e the lessor in a lease.
&. <o$ sho$ld only lease an asset if the lease will 1e f$lly amortiBed.

2;. 'he most cited reason why firms enter into lease agreements is to(
". lower ta-es.
#. impro/e cash flows.
C. red$ce $ncertainty.
%. a/oid 1alance sheet reporting.
&. 1ypass restricti/e loan co/enants.

2@. hich one of the following is most li9ely the primary reason why a lessee opts to lease an
asset on a short-term 1asis rather than 1$y that asset!
". 9eep the asset off the 1alance sheet
#. ta- a/oidance
C. lower total cost
%. increased collateral
&. nonreco$rse protection

)A. 2redDs 8arage is trying to decide whether to lease or 1$y some new e+$ipment. 'he
e+$ipment costs $0;.AAA and has a 6-year life. 'he e+$ipment will 1e worthless after the 6
years and will ha/e to 1e replaced. 'he company has a ta- rate of )1 percent. a cost of
1orrowed f$nds of 7.5 percent. and $ses straight-line depreciation. 'he e+$ipment can 1e
leased for $1A.6AA a year. hat is the amo$nt of the afterta- lease payment!
". $).2;6.AA
#. $7.)10.AA
C. $7.;62.55
%. $;.0A6.16
&. $1A.@2;.6A

27-;
)1. Eamestown C$pply is trying to decide whether to lease or 1$y some new e+$ipment. 'he
e+$ipment costs $72.AAA. has a 0-year life. and will 1e worthless after the 0 years. 'he
e+$ipment will 1e replaced. 'he cost of 1orrowed f$nds is @ percent and the ta- rate is )0
percent. 'he e+$ipment can 1e leased for $2).;AA a year. hat is the amo$nt of the afterta-
lease payment!
". $1).;@7
#. $10.25A
C. $10.667
%. $15.7A;
&. $15.;2A

)2. =orthern Lights is trying to decide whether to lease or 1$y some new e+$ipment. 'he
company has a ta- rate of )0 percent. a cost of 1orrowed f$nds of ;.75 percent. and $ses
straight-line depreciation. 'he e+$ipment can 1e leased for $10.1AA a year. hat is the
amo$nt of the ann$al depreciation ta- shield!
". $).06;
#. $5.;7;
C. $6.@)6
%. $;.0A7
&. $1A.2AA

)). 'he #l$e 8oose is trying to decide whether to lease or 1$y some new refrigeration
e+$ipment for the resta$rant. 'he e+$ipment costs $6).AAA. has a 7-year life and will 1e
worthless after the 7 years. 'he cost of 1orrowed f$nds is ;.0 percent and the ta- rate is )2
percent. 'he e+$ipment can 1e leased for $@.;AA a year. hat is the amo$nt of the ann$al
depreciation ta- shield if the firm $ses straight-line depreciation!
". $2.;;A
#. $0.)AA
C. $7.5AA
%. $;.)))
&. $@.AAA

27-@
)0. ?alDs >iBBeria is contemplating the ac+$isition of some new commercial o/ens. 'he
p$rchase price is $);.AAA. 'he e+$ipment will 1e depreciated 1ased on M"CRC depreciation
which allows for )).)) percent. 00.00 percent. 10.;2 percent. and 7.01 percent depreciation
o/er years 1 to 0. respecti/ely. 'he e+$ipment will 1e worthless at the end of 0 years. 'he
e+$ipment can 1e leased for $12.5AA a year. 'he firm can 1orrow money at ; percent and has
a )5 percent ta- rate. hat is the amo$nt of the depreciation ta- shield in year )!
". $1.525.27
#. $1.620.5A
C. $1.@71.A6
%. $2.)25.AA
&. $2.6)1.6A

)5. EaneDs 2loor Care is contemplating the ac+$isition of some new e+$ipment for refinishing
wood floors. 'he p$rchase price is $70.AAA. 'he firm $ses M"CRC depreciation which allows
for )).)) percent. 00.00 percent. 10.;2 percent. and 7.01 percent depreciation o/er years 1 to
0. respecti/ely. 'he e+$ipment can 1e leased for $20.6AA a year. 'he firm can 1orrow money
at @.5 percent and has a )0 percent ta- rate. hat is the amo$nt of the depreciation ta- shield
in year 0!
". $1.75;.A@
#. $1.;60.)6
C. $1.@0A.;A
%. $2.A11.67
&. $2.221.A;

)6. Cte/enDs "$to %etailers is trying to decide whether to lease or 1$y some new e+$ipment
for polishing /ehicles. 'he e+$ipment costs $22.AAA. has a )-year life. and will 1e worthless
after the ) years. 'he afterta- disco$nt rate is 6.2 percent. 'he ann$al depreciation ta- shield
is $1.76A and the afterta- ann$al lease payment is $6.65A. hat is the net ad/antage to
leasing!
". -$)@7.11
#. -$20;.16
C. $1;0.@2
%. $)15.0A
&. $062.;0

27-1A
)7. >recision 'ool is trying to decide whether to lease or 1$y some new e+$ipment for its tool
and die operations. 'he e+$ipment costs $1.2 million has a 7-year life. and will 1e worthless
after the 7 years. 'he pre-ta- cost of 1orrowed f$nds is ; percent and the ta- rate is )2
percent. 'he e+$ipment can 1e leased for $202.5AA a year. hat is the net ad/antage to
leasing!
". -$51.566
#. -$)0.211
C. $)7.50@
%. $56.;2;
&. $7@.660

);. %eep Mining. :nc.. is contemplating the ac+$isition of some new e+$ipment for
controlling coal d$st that costs $170.AAA. 'he firm $ses M"CRC depreciation which allows
0. respecti/ely. "fter that time. the e+$ipment will 1e worthless. 'he e+$ipment can 1e leased
for $50.0AA a year for 0 years. 'he firm can 1orrow money at 11.5 percent and has a )6
percent ta- rate. hat is the net ad/antage to leasing!
". $2.02@
#. $2.6A7
C. $).611
%. $).;07
&. $).@5A

)@. =ational &/ent Coordinators is contemplating the ac+$isition of a new tent that will 1e
$sed for ma,or o$tdoor e/ents. 'he p$rchase price is $107.AAA. 'he firm $ses M"CRC
depreciation which allows for )).)) percent. 00.00 percent. 10.;2 percent. and 7.01 percent
depreciation o/er years 1 to 0. respecti/ely. 'he tent will 1e worthless after fo$r years. 'he
tent can 1e leased for fo$r years at $02.5AA a year. 'he firm can 1orrow money at 7.5 percent
and has a )0 percent ta- rate. hat is the net ad/antage to leasing!
". $1.7;@
#. $1.;62
C. $1.@22
%. $2.A;7
&. $2.127

27-11
0A. #a-ter Contractors is e/al$ating the lease /ers$s the p$rchase of a $)2@.AAA machine. 'he
machine will 1e depreciated $sing M"CRC o/er a 0-year period. after which the machine will
1e worthless. M"CRC allows for )).)) percent. 00.00 percent. 10.;2 percent. and 7.01
percent depreciation o/er years 1 to 0. respecti/ely. 'he machine co$ld 1e leased for
$1A0.1AA a year for 0 years. 'he firm can 1orrow money at @.5 percent and has a )5 percent
ta- rate. 'he firm does not e-pect to pay any ta-es for the ne-t 5 years. hat is the net
ad/antage to leasing!
". -$1.667
#. -$0.5;7
C. -$1;.60A
%. -$21.651
&. -$)A.277

01. 2roBen 2oods %eli/ery is considering the p$rchase of a deli/ery tr$c9 costing $0@.AAA.
'he tr$c9 can 1e leased for ) years at $1@.5AA per year or it can 1e p$rchased at an interest
rate of 7.5 percent. 'he estimated life of the tr$c9 is ) years. 'he corporate ta- rate is )0
percent. 'he company does not e-pect to owe any ta-es for the ne-t se/eral years d$e to
acc$m$lated net operating losses. 'he firm $ses straight-line depreciation. hat is the net
". -$1.71A
#. -$;66
C. $)A0
%. $1.AA6
&. $1.)@0

02. Cayman >rod$ctions is considering either leasing or 1$ying some new $nderwater
photographic e+$ipment. 'he lessor will charge $26.5AA a year for a 2-year lease. 'he
p$rchase price is $0;.6AA. 'he e+$ipment has a 2-year life after which time it will 1e
worthless. Cayman $ses straight-line depreciation. 1orrows money at ; percent. and has
s$fficient ta- loss carryo/ers to offset any ta-es which otherwise might 1e owed for the ne-t 0
years. hat is the net ad/antage to leasing!
". -$1.)15
#. -$1.2@;
C. $1.)0)
%. $1.0A6
&. $1.057

27-12
0). 8reen ?alley 2arms is considering either leasing or 1$ying some new farm e+$ipment.
'he lessor will charge $27.5AA a year for a 5-year lease. 'he p$rchase price is $1)6.AAA. 'he
e+$ipment has a 5-year life after which time it will 1e worthless. 8reen ?alley 2arms $ses
straight-line depreciation. has a )2 percent ta- rate. 1orrows money at 1A percent. and has
s$fficient ta- loss carryo/ers to offset any potential ta-a1le income the firm might ha/e o/er
the ne-t fi/e years. hat is the net ad/antage to leasing!
". $2A.570
#. $21.5A7
C. $22.6);
%. $26.2;)
&. $)1.75)

00. Cool 'reats is considering either leasing or 1$ying a new freeBer $nit. 'he lessor will
charge $12.6AA a year for a 2-year lease. 'he p$rchase price is $)2.AAA. 'he freeBer has a 2-
year life after which time it is e-pected to ha/e a resale /al$e of $1A.AAA. Cool 'reats $ses
straight-line depreciation. 1orrows money at ; percent. and has s$fficient ta- loss carryo/ers
to offset any potential ta-a1le income the firm might ha/e o/er the ne-t 5 years. hat is the
net ad/antage to leasing!
". $167
#. $);0
C. $57)
%. $71A
&. $@57

05. illiamsD >aints is weighing a lease /ers$s a p$rchase of some new machinery. 'he
p$rchase price is $)12.AAA. 'he e+$ipment will 1e depreciated to Bero o/er the 0-year life of
the pro,ect after which time it is e-pected to ha/e a resale /al$e of $76.AAA. 'he firm $ses
straight-line depreciation and can 1orrow money at ; percent. 'he e+$ipment can 1e leased
for $66.AAA a year for 0 years. illiamsD >aints does not e-pect to owe any ta-es for the ne-t
0 years 1eca$se of its net operating losses. hat is the net ad/antage to leasing!
". $@.;06
#. $11.@AA
C. $20.@20
%. $2;.2A7
&. $)7.5)7

27-1)
06. #o1Ds >iBBa is considering either leasing or 1$ying a new o/en. 'he lease payments wo$ld
1e $1A.0AA a year for ) years. 'he p$rchase price is $2@.AAA. 'he e+$ipment has a )-year life
and then is e-pected to ha/e a resale /al$e of $).5AA. #o1Ds >iBBa $ses straight-line
depreciation. 1orrows money at 1A percent. and has a )2 percent ta- rate. hat is the net
". $2A@
#. $2))
C. $20;
%. $271
&. $2@;

07. Charleston Marina is considering either leasing or 1$ying some new e+$ipment it needs
for repairing 1oats. 'he lease payments wo$ld 1e $7.2AA a year for ) years. 'he p$rchase
price is $2A.;AA. 'he e+$ipment has a )-year life and then is e-pected to ha/e a resale /al$e
of $0.7AA. 'he firm $ses straight-line depreciation. 1orrows money at ;.5 percent. and has a
)0 percent ta- rate. hat is the net ad/antage to leasing!
". -$1.5A7
#. -$1.222
C. -$@75
%. $0A;
&. $611

0;. 2argo =orth is considering the p$rchase of some new e+$ipment costing $112.AAA. 'his
e+$ipment has a 5-year life after which it will 1e worthless. 'he firm $ses straight-line
depreciation and 1orrows f$nds at @ percent interest. 'he companyDs ta- rate is )) percent.
'he firm also has the option of leasing the e+$ipment. hat is the amo$nt of the 1rea9-e/en
lease payment!
". $2;.6;0
#. $)1.067
C. $)1.775
%. $)).71@
&. $)0.;@7

27-10
0@. " firm 1orrows money at ;.75 percent. $ses straight-line depreciation. and has a )7
percent ta- rate. 'he firmDs 1rea9-e/en afterta- ann$al lease payment on a machine is
$16.511. 7ow m$ch will the firm ha/e to pay ann$ally to the lessor to lease this machine!
". $16.511
#. $1@.0A;
C. $22.62A
%. $2).@1@
&. $26.2A;

5A. 2ireplaces and More is considering the p$rchase of a deli/ery tr$c9 costing $2@.AAA. 'he
tr$c9 will 1e $sed for 5 years and then it will 1e worthless. 'he financing rate for the p$rchase
is 7.5 percent and the corporate ta- rate is )2 percent. 'he firm $ses straight-line depreciation.
hat is the 1rea9-e/en lease payment amo$nt!
". $7.10;
#. $7.)1;
C. $7.506
%. $;.A);
&. $;.250

51. <o$r firm is considering either leasing or 1$ying some new e+$ipment. 'he lessor will
charge $1).;AA a year for 0 years sho$ld yo$ decide to lease. 'he p$rchase price is $07.;AA.
'he e+$ipment has a 0-year life after which it is e-pected to ha/e a resale /al$e of $;.0AA.
<o$r firm $ses straight-line depreciation. 1orrows money at 1A percent. and has a )) percent
ta- rate. hat is the afterta- sal/age /al$e of the e+$ipment!
". $5.500
#. $5.62;
C. $5.7A@
%. $5.70;
&. $5.;2A

27-15
52. EF* &nterprises is considering either leasing or 1$ying some new e+$ipment. 'he lease
payments wo$ld 1e $).;AA a year. 'he p$rchase price is $1@.@AA. 'he e+$ipment has a 6-year
life after which it is e-pected to ha/e a resale /al$e of $2.1AA. <o$r firm $ses straight-line
depreciation. 1orrows money at 11.5 percent. and has a )2 percent ta- rate. hat is the
afterta- sal/age /al$e of the e+$ipment!
". $1.0A7
#. $1.02;
C. $1.071
%. $1.076
&. $1.512

5). Cross 'own &-press is contemplating the ac+$isition of some new e+$ipment. 'he
p$rchase price is $70.AAA. 'he e+$ipment wo$ld 1e depreciated $sing M"CRC depreciation
o/er years 1 to 0. respecti/ely. 'he e+$ipment wo$ld 1e worthless after that time. 'he
e+$ipment can 1e leased for $1@.1AA a year for 0 years. 'he firm can 1orrow money at @.5
percent and has a 2; percent ta- rate. hat is the incremental ann$al cash flow for year ) if
the company decides to lease the e+$ipment rather than p$rchase it!
". -$16.;2)
#. -$15.7@7
C. $10.)12
%. $15.7@7
&. $16.;2)

50. :nterstate Cer/ices needs some e+$ipment costing $61.AAA. 'he e+$ipment has a 0-year
life after which it will 1e worthless. 'he firm $ses M"CRC depreciation which allows for
)).)) percent. 00.00 percent. 10.;2 percent. and 7.01 percent depreciation o/er years 1 to 0.
respecti/ely. 'he e+$ipment can 1e leased for $16.6AA a year. 'he firm can 1orrow money at
7.5 percent and has a )6 percent ta- rate. hat is the incremental ann$al cash flow for year 2
if the company decides to lease the e+$ipment rather than p$rchase it!
". -$1;.;@7
#. -$1@.2;6
C. -$1@.);@
%. -$1@.0A7
&. -$2A.);)

27-16
55. Morrison :nd$strial 'ool can either lease or 1$y some e+$ipment. 'he lease payments
wo$ld 1e $12.0AA a year. 'he p$rchase price is $)0.@AA. 'he e+$ipment has a )-year life after
which it is e-pected to ha/e a resale /al$e of $5.5AA. 'he firm $ses straight-line depreciation
o/er the assetDs life. 1orrows money at ; percent. and has a )0 percent ta- rate. hat is the
incremental cash flow for year 1 if the company decides to lease the e+$ipment rather than
p$rchase it!
". -$22.0A5
#. -$16.;A5
C. -$12.1)@
%. -$;.1;0
&. -$0.@A5

56. " firm can either lease or 1$y some new e+$ipment. 'he lease payments wo$ld 1e
$1@.7AA a year for 0 years. 'he p$rchase price is $72.@AA. 'he e+$ipment has a 0-year life
after which it is e-pected to ha/e a resale /al$e of $).6AA. 'he firm $ses straight-line
depreciation o/er the life of the asset. 1orrows money at 11 percent. and has a )5 percent ta-
rate. 'he company does not e-pect to owe any ta-es for at least 0 years 1eca$se it has
acc$m$lated net operating losses. hat is the incremental cash flow for year ) if the company
decides to lease rather than p$rchase the e+$ipment!
". -$2@.165
#. -$21.;21
C. -$1@.7AA
%. -$1;.55@
&. -$17.6)5

57. %aily &nterprises is contemplating the ac+$isition of some new e+$ipment. 'he p$rchase
price is $06.AAA. 'he company e-pects to sell the e+$ipment at the end of year 0 for $2.5AA.
'he firm $ses M"CRC depreciation which allows for )).)) percent. 00.00 percent. 10.;2
percent. and 7.01 percent depreciation o/er years 1 to 0. respecti/ely. 'he e+$ipment can 1e
leased for $12.)AA a year for 0 years. 'he firm can 1orrow money at 7.5 percent and has a )5
percent ta- rate. hat is the incremental ann$al cash flow for year 0 if the company decides
to lease the e+$ipment rather than p$rchase it!
". -$10.0)0
#. -$12.7)0
C. -$1A.;1)
%. -$@.0)0
&. -$;.766

27-17
5;. 2ran9Ds "$to Repair can p$rchase a new machine for $1)6.AAA. 'he machine has a 0-year
life and can 1e sold at the end of year 0 for $15.AAA. 2ran9Ds $ses M"CRC depreciation which
allows for )).)) percent. 00.00 percent. 10.;2 percent. and 7.01 percent depreciation o/er
years 1 to 0. respecti/ely. 'he e+$ipment can 1e leased for $)5.@AA a year. 'he firm can
1orrow money at 7.5 percent and has a )2 percent ta- rate. 'he company does not e-pect to
owe any ta-es for at least the ne-t 0 years d$e to net operating losses. hat is the incremental
ann$al cash flow for year 0 if the company decides to lease rather than p$rchase the
e+$ipment!
". -$5A.@AA
#. -$)5.@AA
C. -$2A.@AA
%. $15.@AA
&. $)5.@AA

Essay Questions

5@. &-plain the differences 1etween p$rchasing an asset and leasing an asset.

6A. hat are some GgoodG reasons for opting to lease rather than p$rchase an asset!

27-1;
61. &-plain the Gleasing parado-G and also e-plain why leasing is or is not a GBero s$m
gameG.

62. hy might a firm opt to sell and lease1ac9 an asset which it c$rrently owns!


6). <o$ wor9 for a n$clear research la1oratory that is contemplating leasing a diagnostic
scanner 3leasing is a /ery common practice with e-pensi/e. high-tech e+$ipment4. 'he
scanner costs $).5 million and it wo$ld 1e depreciated straight-line to Bero o/er 0 years.
#eca$se of radiation contamination. it will act$ally 1e completely /al$eless in 0 years. <o$
can lease it for $;75.AAA per year for 0 years. "ss$me the ta- rate is )) percent. <o$ can
1orrow at 1A percent 1efore ta-es. hat is the net ad/antage to leasing from yo$r companyDs
standpoint!
". $06;.216
#. $0@1.)1@
C. $516.AA7
%. $5)A.06;
&. $501.707

27-1@
60. <o$ wor9 for a n$clear research la1oratory that is contemplating leasing a diagnostic
scanner costs $2 million and it wo$ld 1e depreciated straight-line to Bero o/er 0 years.
can lease it for $5AA.AAA per year for 0 years. "ss$me the ta- rate is )0 percent. <o$ can
1orrow at 1A percent 1efore ta-es. hat is the net ad/antage to leasing from the lessorDs
/iewpoint!
". -$2@A.@;;
#. -$267.)A7
C. -$20;.060
%. $26.22;
&. $1A).511

#eca$se of radiation contamination. it will act$ally 1e completely /al$eless in 0 years.
"ss$me the ta- rate is )) percent. <o$ can 1orrow at 6 percent 1efore ta-es. 7ow m$ch
wo$ld the lease payment ha/e to 1e in order for 1oth the lessor and the lessee to 1e indifferent
a1o$t the lease!
". $5AA.AAA
#. $521.@A@
C. $552.2AA
%. $56).)))
&. $576.077

can lease it for $6AA.AAA per year for 0 years. "ss$me yo$r company does not contemplate
paying ta-es for the ne-t se/eral years. <o$ can 1orrow at 6 percent 1efore ta-es. hat is the
net ad/antage to leasing from yo$r companyDs standpoint!
". -$;2.711
#. -$7@.A6)
C. -$21.0A@
%. -$2A.;1;
&. -$1;.)15

27-2A
scanner costs $) million and it wo$ld 1e depreciated straight-line to Bero o/er 0 years.
can lease it for $75A.AAA per year for 0 years. "ss$me the ta- rate is )1 percent. <o$ can
1orrow at ; percent 1efore ta-es. <o$r company does not e-pect to pay ta-es for the ne-t
se/eral years. 1$t the leasing company will pay ta-es. hat range of lease payments will
allow the lease to 1e profita1le for 1oth parties!
". $@A0.A26 to $@A5.12)
#. $@A0.A26 to $@A5.0;1
C. $@A0.A26 to $@A5.762
%. $@A5.12) to $@A6.017
&. $@A5.12) to $@A6.;25

6;. 'he ildcat Hil Company is trying to decide whether to lease or 1$y a new comp$ter-
assisted drilling system for its oil e-ploration 1$siness. Management has decided that it m$st
$se the system to stay competiti/eI it will pro/ide $;5A.AAA in ann$al preta- cost sa/ings. 'he
system costs $; million and will 1e depreciated straight-line to Bero o/er 5 years. ildcatDs
ta- rate is )1 percent. and the firm can 1orrow at ; percent. Lam1ert Leasing Company has
offered to lease the drilling e+$ipment to ildcat for payments of $2.A0A.AAA per year.
Lam1ertDs policy is to re+$ire its lessees to ma9e payments at the start of the year. hat is the
ma-im$m lease payment that wo$ld 1e accepta1le to the company!
". $1.;@2.0@7
#. $ 1.;@).2)1
C. $1.@A0.5A6
%. $1.@A6.)1;
&. $1.@11.072

27-21
6@. 'he ildcat Hil Company is trying to decide whether to lease or 1$y a new comp$ter-
$se the system to stay competiti/eI it will pro/ide $55A.AAA in ann$al preta- cost sa/ings. 'he
system costs $) million and will 1e depreciated straight-line to Bero o/er 0 years. :t is
estimated that the e+$ipment will ha/e an afterta- resid$al /al$e of $5AA.AAA at then end of
the lease. ildcatDs ta- rate is )1 percent. and the firm can 1orrow at 1A percent. Lam1ert
Leasing Company has offered to lease the drilling e+$ipment to ildcat for payments of
$@0A.AAA per year. Lam1ertDs policy is to re+$ire its lessees to ma9e payments at the start of
the year. hat is the ma-im$m lease payment that wo$ld 1e accepta1le to the company!
". $72@.@)2
#. $7)0.515
C. $70;.2AA
%. $751.606
&. $762.@)7

7A. 'he ildcat Hil Company is trying to decide whether to lease or 1$y a new comp$ter-
$se the system to stay competiti/eI it will pro/ide $1.2 million in ann$al preta- cost sa/ings.
'he system costs $6.7 million and will 1e depreciated straight-line to Bero o/er 0 years.
ildcatDs ta- rate is )5 percent. and the firm can 1orrow at 11 percent. Lam1ert Leasing
Company has offered to lease the drilling e+$ipment to ildcat for payments of $1.75A.AAA
per year. Lam1ertDs policy is to re+$ire its lessees to ma9e payments at the start of the year.
Lam1ert re+$ires ildcat to pay a $27A.AAA sec$rity deposit at the inception of the lease.
hat is the ="L of leasing the e+$ipment!
". $522.0A;
#. $501.2;7
C. $55A.)1;
%. $561.;2;
&. $560.71@

71. "n asset costs $02A.AAA and will 1e depreciated in a straight-line manner o/er its )-year
life. :t will ha/e no sal/age /al$e. 'he corporate ta- rate is )2 percent. and the appropriate
interest rate is ; percent. hat lease payment amo$nt will ma9e the lessee and the lessor
e+$ally well off!
". $105.717.A;
#. $150.101.11
C. $157.77;.A)
%. $162.7@5.)0
&. $165.A25.5A

27-22
72. "$tomo1iles are often leased. and se/eral terms are $ni+$e to a$to leases. C$ppose yo$
are considering leasing a car. 'he price yo$ and the dealer agree on for the car is $)2.AAA.
'his is the 1ase capitaliBed cost. Hther costs added to the capitaliBed cost price incl$de the
ac+$isition 31an94 fee. ins$rance. or e-tended warranty. "ss$me these costs are $)@A.
CapitaliBation cost red$ctions incl$de any down payment. credit of trade-in. or dealer re1ate.
"ss$me yo$ ma9e a down payment of $2.6AA. and there is no trade-in or re1ate. :f yo$ dri/e
11.AAA miles per year. the lease-end resid$al /al$e for this car will 1e $1;.7AA after three
years. 'he lease factor. which is the interest rate on the loan. is the ">R of the loan di/ided 1y
2.0AA. 3eDre not really s$re where the 2.0AA comes from. either.4 'he lease factor the dealer
+$otes yo$ is A.AA2A;. 'he monthly lease payment consists of three partsI a depreciation fee.
a finance fee. and sales ta-. 'he depreciation fee is the net capitaliBation cost min$s the
resid$al /al$e. di/ided 1y the term of the lease. 'he net capitaliBation cost is the cost of the
car min$s any cost red$ctions pl$s any additional costs. 'he finance fee is the net
capitaliBation cost pl$s the resid$al. times the money factor. and the monthly sales ta- is
simply the monthly lease payments times the ta- rate. hat is yo$r monthly lease payment
for a )6-month lease if the sales ta- is ; percent!
". $)2@.A;
#. $)02.6)
C. $)7@.;2
%. $0A2.20
&. $001.6)

27-2)
Chapter 27 Leasing "nswer *ey


1. Ron leases a car from Uptown Motors and pays $225 a month as a lease payment. hich
one of the following terms applies to Ron!
A. lessee
#. lessor
C. g$arantor
%. tr$stee
&. manager
Refer to section 27.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#$%
Section: "#&%
'o(ic: Lessee

2. 'he party who owns a leased asset is called the(
". lessee.
B. lessor.
C. g$arantor.
%. tr$stee.
&. manager.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: Lessor

27-20
). *ate is leasing some e+$ipment from ",a- Leasing for a period of one-year. ",a- pays the
maintenance. ta-es. and ins$rance costs for this e+$ipment. 'he life of the e+$ipment is 7
years. hich type of lease does *ate ha/e!
". open
#. straight
C. operating
%. financial
&. ta--oriented

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: O(erating lease

0. "lfredo has a non-cancela1le. fi/e year lease on an ind$strial-grade sewing machine for
stitching $pholstery. 2or acco$nting p$rposes. this is considered to 1e a capital lease. 'he life
of the sewing machine is fi/e years. "lfredo m$st pay all ta-es and ins$rances related to this
lease. hich type of lease does "lfredo ha/e on this sewing machine!
". open
#. straight
C. operating
D. financial
&. ta--oriented

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: )inancial lease

27-25
5. " financial lease in which the lessor is the owner for ta- p$rposes is called a3n4 55555
lease.
". open
#. straight
C. operating
D. ta--oriented
&. ta--e-empt

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: 'a*$oriented lease

6. 7ea/y &+$ipment Rentals 1orrows money on a nonreco$rse 1asis from 'he 2inancial
8ro$p to f$nd its p$rchases of constr$ction e+$ipment s$ch as 1ac9hoes. graders. earth
mo/ers. etc. 'his e+$ipment is then leased to contractors. 'he leases are classified as ta--
oriented leases. hich one of the following terms 1est descri1es these lease of constr$ction
e+$ipment!
A. le/eraged lease
#. sale and lease1ac9 arrangement
C. operating lease
%. perpet$al lease
&. straight lease

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: Le!eraged lease

27-26
7. #rentwood :nd$stries is selling its tool and die e+$ipment to Upward 2inancial and then
leasing that e+$ipment from Upward for a period of ten years. which is the $sef$l remaining
life of the e+$ipment. hich type of lease arrangement is this!
". le/eraged lease
B. sale and lease1ac9
C. operating lease
%. ta--oriented lease
&. straight lease

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: Sale and leasebac+

;. <o$ are comparing a lease to a p$rchase. 'he =>? associated with this analysis is referred
to as the(
". open interest net present /al$e.
#. depreciated net present /al$e.
C. net ad/antage to leasing.
%. profita1ility inde-.
&. net /al$e of p$rchasing.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#$,
Section: "#&-
'o(ic: Net ad!antage to leasing

27-27
@. hich one of the following statements is correct concerning the lease /ers$s 1$y decision!
". 'he lessor is primarily concerned with ret$rning the asset at the end of the lease term
witho$t inc$rring any additional charges.
#. 'he lessor is primarily concerned a1o$t the $se of the asset.
C. :f %ell Comp$ter 1ecame a lessor of its own comp$ters it wo$ld 1e engaging in direct
leasing.
%. " firm sho$ld always p$rchase. rather than lease. any asset that has a pro,ected positi/e
sal/age /al$e at the end of the rele/ant period of $se.
E. Lessors pro/ide a so$rce of financing for lessees.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: Leasing !ersus buying

1A. :n a direct lease. the lessor(
:. is the end $ser of the asset.
::. rents the leased asset from the man$fact$rer.
:::. owns the asset.
:?. is generally an independent leasing company.
". :: and ::: only
#. : and :? only
C. ::: and :? only
%. ::. :::. and :? only
&. :. ::. :::. and :?

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%
'o(ic: Direct lease

27-2;
11. "n operating lease has which of the following characteristics!
:. lessee has responsi1ility for the maintenance and ins$rance
::. lease payments co/er the f$ll cost of the asset
:::. economic life of the asset e-ceeds the lease term
:?. lessee can cancel the lease prior to the e-piration date
". : and ::: only
#. :: and :? only
C. : and :: only
D. ::: and :? only
&. :. ::. and ::: only

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%

A. is generally called a capital lease 1y acco$ntants.
#. re+$ires the lessor to maintain the asset.
C. is a partially amortiBed lease.
%. is often called a single net lease.
&. can generally 1e cancelled witho$t penalty.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%

27-2@
1). " le/eraged lease is a(
". lease where the lessee is the owner of the asset for ta- p$rposes.
#. sale and lease1ac9 arrangement.
C. type of operating lease.
%. lease paid with money 1orrowed 1y the lessee.
E. lease where the lessor 1orrows on a nonreco$rse 1asis.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%

10. hich of the following apply to the lessee of a sale and lease1ac9 arrangement!
:. may ha/e option to p$rchase asset at end of lease term
::. recei/es cash from the sale of the asset
:::. maintains ownership rights
:?. $ses the asset
". : and :? only
#. :: and ::: only
C. :. ::. and :? only
%. ::. :::. and :? only
&. :. ::. :::. and :?

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%

27-)A
15. " firm that is /ery cyclical in nat$re and re+$ires e-tra e+$ipment only d$ring its pea9
periods sho$ld consider leasing that e+$ipment $sing a3n4 55555 lease.
A. operating
#. ta--oriented
C. sale and 1$y1ac9
%. le/eraged
&. financial

AACSB: N/A
Bloom's: Com(re.ension
Difficulty: Basic
Section: "#&%

:. is generally a f$lly amortiBed lease.
::. $s$ally re+$ires the lessee to ins$re the asset.
:::. is generally cancela1le witho$t penalty if the lessee pro/ides )A days ad/ance notice.
:?. is referred to as a capital lease 1y acco$ntants.
". : and ::: only
#. :: and :? only
C. : and :: only
%. ::. :::. and :? only
E. :. ::. and :? only

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%

27-)1
17. :f a firm does not e-pect to owe ta-es for a few years and needs some e+$ipment. the firm
sho$ld(
". lease the e+$ipment and retain the ta- 1enefits.
B. lease the e+$ipment with the lessor retaining the ta- ownership of the asset.
C. 1orrow the money to 1$y the asset and then depreciate it $sing M"CRC depreciation.
%. 1$y the e+$ipment with cash and depreciate it $sing M"CRC.
&. 1$y the e+$ipment and depreciate it straight-line o/er the life of the asset.

AACSB: N/A
Difficulty: Basic
Section: "#&%
'o(ic: 'a*$oriented lease

1;. :f a lessor 1orrows money on a nonreco$rse 1asis to p$rchase an asset that will 1e leased
to another party. then(
". the lessor is responsi1le for the payments on the 1orrowed f$nds whether or not the lessee
pays the lease payments.
#. the lessee m$st pay 1oth the lease payment and the loan payment.
C. the loan is considered paid in f$ll if the lessee discontin$es ma9ing the lease payments or
terminates the lease early.
D. the lessor is only o1ligated to ma9e loan payments as long as the lessor is collecting the
lease payments.
&. the lessor m$st p$rs$e the lessee if the lessee fails to ma9e the agreed $pon lease payments.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%

27-)2
1@. :f a firm enters a sale and lease1ac9 agreement. then(
:. the lessee will 1enefit from an immediate cash inflow.
::. 1oth the lessor and the lessee may 1enefit if the lessor can 1enefit more from the ta-
1enefits of ownership than can the lessee.
:::. the lease a$tomatically 1ecomes a nonreco$rse lease.
:?. the lessee forfeits the right to rep$rchase the asset at a later date.
". : and ::: only
#. :: and :? only
C. : and :: only
%. :: and ::: only
&. ::: and :? only

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%

2A. "n operating lease(
". is recorded at its net present /al$e on the 1alance sheet.
#. is recorded on the 1alance sheet as 1oth an asset and a lia1ility.
C. is recorded at its estimated resid$al 1alance on the 1alance sheet.
D. is reflected in the footnotes rather than on the 1alance sheet.
&. does not appear either on a financial statement or in the footnotes.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"

27-))
21. hich one of the following will classify a lease as a capital lease for acco$nting
p$rposes!
A. 'he lease transfers ownership of the asset to the lessee 1y the end of the lease.
#. 'he lease term is 75 percent or less of the estimated economic life of the asset.
C. 'he lessee can 1$y the asset at fair mar9et /al$e at the end of the lease.
%. 'he initial present /al$e of the lease payments e+$als or e-ceeds ;A percent of the fair
mar9et /al$e of the asset.
&. 'he total of the lease payments e-ceeds $1AA.AAA.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"
'o(ic: Ca(ital lease

22. " capital lease is recorded as an asset on the 1alance sheet in an amo$nt e+$al to(
". the dollar amo$nt of each lease payment m$ltiplied 1y the total n$m1er of lease payments
in the original agreement.
#. the dollar amo$nt of each lease payment m$ltiplied 1y the n$m1er of lease payments
remaining.
C. the dollar amo$nt of each lease payment m$ltiplied 1y the n$m1er of lease payments per
year.
D. the lesser of the present /al$e of the remaining lease payments or the cost of the asset.
&. the f$t$re /al$e of the lease agreement at the time the agreement was made.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&"
'o(ic: Ca(ital lease

27-)0
2). hich one of the following correctly states one of the conditions esta1lished 1y the :RC
for a lease to 1e considered /alid for ta- p$rposes!
". 'he lease sho$ld ha/e high payments at the 1eginning of the lease period and low
payments at the end of the lease period.
#. "ny renewal option sho$ld 1e 1ased on a /al$e which is less than the fair mar9et /al$e of
the asset at the time of renewal.
C. 'he term of the lease m$st 1e less than ;A percent of the economic life of the asset.
%. 'he lessee sho$ld ha/e the option to p$rchase the asset at a disco$nted price at the end of
the lease term.
&. 'he lessor m$st ha/e a reasona1le e-pectation of earning an afterta- profit.
Refer to section 27.)

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&,
'o(ic: Leases and t.e /0S

20. 'he :RC will disallow any lease that(
". has a lease term in e-cess of three years.
#. has a term that is less than one-half of the economic life of the asset.
C. in/ol/es a lessee that has net operating losses.
D. appears to e-ist solely to defer ta-es.
&. red$ces the com1ined ta- o1ligations of the lessor and the lessee.
Refer to section 27.)

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&,
'o(ic: 'a*es and leasing

27-)5
25. 'he incremental cash flows of leasing consider which of the following!
:. cost of the asset
::. lease payment amo$nt
:::. applica1le ta- rate
:?. ann$al depreciation e-pense
". : and ::: only
#. :: and :? only
C. ::. :::. and :? only
%. :. ::. and :? only
E. :. ::. :::. and :?

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&1
'o(ic: /ncremental cas. flows

26. 'he rele/ant disco$nt rate for e/al$ating a lease is the firmDs(
". cost of e+$ity financing.
#. pre-ta- cost of 1orrowing.
C. afterta- cost of 1orrowing.
%. cost of wor9ing capital.
&. rate of ret$rn on short-term assets.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&1
'o(ic: Lease discount rate

27-)6
27. hich one of the following statements is correct concerning ta-es and leasing!
A. 'a--deferral is a legitimate reason for leasing.
#. 'he lessee sho$ld 1e the party with the higher ta- 1rac9et.
C. 8enerally spea9ing. lessors tend to 1enefit from leases while lessees do not.
%. :f a firm has significant net operating losses. it sho$ld 1e the lessor in a lease.
&. <o$ sho$ld only lease an asset if the lease will 1e f$lly amortiBed.

AACSB: N/A
Difficulty: Basic
Learning Obecti!e: "#$"
Section: "#&#
'o(ic: 'a*es and leasing

2;. 'he most cited reason why firms enter into lease agreements is to(
". lower ta-es.
#. impro/e cash flows.
C. red$ce $ncertainty.
%. a/oid 1alance sheet reporting.
&. 1ypass restricti/e loan co/enants.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&#
'o(ic: 0easons for leasing

27-)7
2@. hich one of the following is most li9ely the primary reason why a lessee opts to lease an
asset on a short-term 1asis rather than 1$y that asset!
". 9eep the asset off the 1alance sheet
#. ta- a/oidance
C. lower total cost
%. increased collateral
&. nonreco$rse protection

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "#&#

)A. 2redDs 8arage is trying to decide whether to lease or 1$y some new e+$ipment. 'he
e+$ipment costs $0;.AAA and has a 6-year life. 'he e+$ipment will 1e worthless after the 6
years and will ha/e to 1e replaced. 'he company has a ta- rate of )1 percent. a cost of
1orrowed f$nds of 7.5 percent. and $ses straight-line depreciation. 'he e+$ipment can 1e
leased for $1A.6AA a year. hat is the amo$nt of the afterta- lease payment!
". $).2;6.AA
B. $7.)10.AA
C. $7.;62.55
%. $;.0A6.16
&. $1A.@2;.6A
"fterta- lease payment J $1A.6AA 31 - A.)14 J $7.)10

AACSB: Analytic
Bloom's: A((lication
Difficulty: Basic
Section: "#&1
'o(ic: Afterta* lease (ayment

27-);
)1. Eamestown C$pply is trying to decide whether to lease or 1$y some new e+$ipment. 'he
e+$ipment will 1e replaced. 'he cost of 1orrowed f$nds is @ percent and the ta- rate is )0
percent. 'he e+$ipment can 1e leased for $2).;AA a year. hat is the amo$nt of the afterta-
lease payment!
". $1).;@7
#. $10.25A
C. $10.667
D. $15.7A;
&. $15.;2A
"fterta- lease payment J $2).;AA 31 - A.)04 J $15.7A;

AACSB: Analytic
Difficulty: Basic
Section: "#&1
'o(ic: Afterta* lease (ayment

)2. =orthern Lights is trying to decide whether to lease or 1$y some new e+$ipment. 'he
company has a ta- rate of )0 percent. a cost of 1orrowed f$nds of ;.75 percent. and $ses
straight-line depreciation. 'he e+$ipment can 1e leased for $10.1AA a year. hat is the
amo$nt of the ann$al depreciation ta- shield!
A. $).06;
#. $5.;7;
C. $6.@)6
%. $;.0A7
&. $1A.2AA
"nn$al depreciation ta- shield J 3$51.AAAK54 3A.)04 J $).06;

AACSB: Analytic
Difficulty: Basic
Section: "#&1
'o(ic: SL De(reciation ta* s.ield

27-)@
)). 'he #l$e 8oose is trying to decide whether to lease or 1$y some new refrigeration
e+$ipment for the resta$rant. 'he e+$ipment costs $6).AAA. has a 7-year life and will 1e
worthless after the 7 years. 'he cost of 1orrowed f$nds is ;.0 percent and the ta- rate is )2
percent. 'he e+$ipment can 1e leased for $@.;AA a year. hat is the amo$nt of the ann$al
depreciation ta- shield if the firm $ses straight-line depreciation!
A. $2.;;A
#. $0.)AA
C. $7.5AA
%. $;.)))
&. $@.AAA
"nn$al depreciation ta- shield J 3$6).AAAK74 3A.)24 J $2.;;A

AACSB: Analytic
Difficulty: Basic
Section: "#&1
'o(ic: SL De(reciation ta* s.ield

)0. ?alDs >iBBeria is contemplating the ac+$isition of some new commercial o/ens. 'he
p$rchase price is $);.AAA. 'he e+$ipment will 1e depreciated 1ased on M"CRC depreciation
o/er years 1 to 0. respecti/ely. 'he e+$ipment will 1e worthless at the end of 0 years. 'he
e+$ipment can 1e leased for $12.5AA a year. 'he firm can 1orrow money at ; percent and has
a )5 percent ta- rate. hat is the amo$nt of the depreciation ta- shield in year )!
". $1.525.27
#. $1.620.5A
C. $1.@71.A6
%. $2.)25.AA
&. $2.6)1.6A
<ear ) depreciation ta- shield J $);.AAA 3A.10;24 3A.)54 J $1.@71.A6

AACSB: Analytic
Difficulty: Basic
Section: "#&1
'o(ic: 2AC0S de(reciation ta* s.ield

27-0A
)5. EaneDs 2loor Care is contemplating the ac+$isition of some new e+$ipment for refinishing
wood floors. 'he p$rchase price is $70.AAA. 'he firm $ses M"CRC depreciation which allows
0. respecti/ely. 'he e+$ipment can 1e leased for $20.6AA a year. 'he firm can 1orrow money
at @.5 percent and has a )0 percent ta- rate. hat is the amo$nt of the depreciation ta- shield
in year 0!
". $1.75;.A@
B. $1.;60.)6
C. $1.@0A.;A
%. $2.A11.67
&. $2.221.A;
<ear 0 depreciation ta- shield J $70.AAA 3A.A7014 3A.)04 J $1.;60.)6

AACSB: Analytic
Difficulty: Basic
Section: "#&1
'o(ic: 2AC0S de(reciation ta* s.ield

)6. Cte/enDs "$to %etailers is trying to decide whether to lease or 1$y some new e+$ipment
for polishing /ehicles. 'he e+$ipment costs $22.AAA. has a )-year life. and will 1e worthless
after the ) years. 'he afterta- disco$nt rate is 6.2 percent. 'he ann$al depreciation ta- shield
is $1.76A and the afterta- ann$al lease payment is $6.65A. hat is the net ad/antage to
leasing!
A. -$)@7.11
#. -$20;.16
C. $1;0.@2
%. $)15.0A
&. $062.;0
="L J $22.AAA - 3$6.65A L $1.76A4 3>?:2"6.2M. )4 J -$)@7.11

AACSB: Analytic
Difficulty: Basic
Section: "#&-
'o(ic: Net ad!antage to leasing $ SL

27-01
)7. >recision 'ool is trying to decide whether to lease or 1$y some new e+$ipment for its tool
and die operations. 'he e+$ipment costs $1.2 million has a 7-year life. and will 1e worthless
after the 7 years. 'he pre-ta- cost of 1orrowed f$nds is ; percent and the ta- rate is )2
percent. 'he e+$ipment can 1e leased for $202.5AA a year. hat is the net ad/antage to
leasing!
A. -$51.566
#. -$)0.211
C. $)7.50@
%. $56.;2;
&. $7@.660
"fterta- lease payment J $202.5AA 31 - A.)24 J $160.@AA
"nn$al depreciation ta- shield J 3$1.2AA.AAAK74 3A.)24 J $50.;57.10
"fterta- disco$nt rate J A.A; 31 - A.)24 J 5.00 percent
="L J $1.2AA.AAA - 3$160.@AA L $50.;57.104 3>?:2"5.00M. 74 J -$51.566

AACSB: Analytic
Bloom's: Analysis
Difficulty: /ntermediate
Section: "#&-
'o(ic: Net ad!antage to leasing $ SL

27-02
);. %eep Mining. :nc.. is contemplating the ac+$isition of some new e+$ipment for
controlling coal d$st that costs $170.AAA. 'he firm $ses M"CRC depreciation which allows
0. respecti/ely. "fter that time. the e+$ipment will 1e worthless. 'he e+$ipment can 1e leased
for $50.0AA a year for 0 years. 'he firm can 1orrow money at 11.5 percent and has a )6
percent ta- rate. hat is the net ad/antage to leasing!
A. $2.02@
#. $2.6A7
C. $).611
%. $).;07
&. $).@5A
"fter-ta- lease payment J $50.0AA 31 - A.)64 J $)0.;16
Lost depreciation ta- shield year 1 J $170.AAA A.)))) A.)6 J $2A.;77.@1
Lost depreciation ta- shield year 2 J $170.AAA A.0000 A.)6 J $27.;)7.22
Lost depreciation ta- shield year ) J $170.AAA A.10;2 A.)6 J $@.2;).25
Lost depreciation ta- shield year 0 J $170.AAA A.A701 A.)6 J $0.601.62
"fterta- disco$nt rate J A.115 31 - A.)64 J A.A7)6

AACSB: Analytic
Bloom's: Analysis
Section: "#&-
'o(ic: Net ad!antage to leasing $ 2AC0S

27-0)
)@. =ational &/ent Coordinators is contemplating the ac+$isition of a new tent that will 1e
$sed for ma,or o$tdoor e/ents. 'he p$rchase price is $107.AAA. 'he firm $ses M"CRC
depreciation which allows for )).)) percent. 00.00 percent. 10.;2 percent. and 7.01 percent
depreciation o/er years 1 to 0. respecti/ely. 'he tent will 1e worthless after fo$r years. 'he
tent can 1e leased for fo$r years at $02.5AA a year. 'he firm can 1orrow money at 7.5 percent
and has a )0 percent ta- rate. hat is the net ad/antage to leasing!
". $1.7;@
#. $1.;62
C. $1.@22
%. $2.A;7
&. $2.127
"fter-ta- lease payment J $02.5AA 31 - A.)04 J $2;.A5A
Lost depreciation ta- shield year 1 J $107.AAA A.)))) A.)0 J $16.65;.))
Lost depreciation ta- shield year 2 J $107.AAA A.0000 A.)0 J $22.211.11
Lost depreciation ta- shield year ) J $107.AAA A.10;2 A.)0 J $7.0A7.A0
Lost depreciation ta- shield year 0 J $107.AAA A.A701 A.)0 J $).7A).52
"fter-ta- disco$nt rate J A.A75 31 - A.)04 J A.A0@;)

AACSB: Analytic
Bloom's: Analysis
Section: "#&-
'o(ic: Net ad!antage to leasing $ 2AC0S

27-00
0A. #a-ter Contractors is e/al$ating the lease /ers$s the p$rchase of a $)2@.AAA machine. 'he
machine will 1e depreciated $sing M"CRC o/er a 0-year period. after which the machine will
1e worthless. M"CRC allows for )).)) percent. 00.00 percent. 10.;2 percent. and 7.01
percent depreciation o/er years 1 to 0. respecti/ely. 'he machine co$ld 1e leased for
$1A0.1AA a year for 0 years. 'he firm can 1orrow money at @.5 percent and has a )5 percent
ta- rate. 'he firm does not e-pect to pay any ta-es for the ne-t 5 years. hat is the net
". -$1.667
B. -$0.5;7
C. -$1;.60A
%. -$21.651
&. -$)A.277
="L J $)2@.AAA - 3$1A0.1AA4 3>?:2"@.5M. 04 J -$0.5;7

AACSB: Analytic
Bloom's: Analysis
Section: "#&#
'o(ic: Net ad!antage to leasing $ 2AC0S3 No ta*

01. 2roBen 2oods %eli/ery is considering the p$rchase of a deli/ery tr$c9 costing $0@.AAA.
'he tr$c9 can 1e leased for ) years at $1@.5AA per year or it can 1e p$rchased at an interest
rate of 7.5 percent. 'he estimated life of the tr$c9 is ) years. 'he corporate ta- rate is )0
percent. 'he company does not e-pect to owe any ta-es for the ne-t se/eral years d$e to
acc$m$lated net operating losses. 'he firm $ses straight-line depreciation. hat is the net
A. -$1.71A
#. -$;66
C. $)A0
%. $1.AA6
&. $1.)@0
="L J $0@.AAA - 3$1@.5AA4 3>?:2"7.5M. )4 J -$1.71A

AACSB: Analytic
Bloom's: Analysis
Section: "#&#
'o(ic: Net ad!antage to leasing $ SL3 No ta*

27-05
02. Cayman >rod$ctions is considering either leasing or 1$ying some new $nderwater
photographic e+$ipment. 'he lessor will charge $26.5AA a year for a 2-year lease. 'he
p$rchase price is $0;.6AA. 'he e+$ipment has a 2-year life after which time it will 1e
worthless. Cayman $ses straight-line depreciation. 1orrows money at ; percent. and has
s$fficient ta- loss carryo/ers to offset any ta-es which otherwise might 1e owed for the ne-t 0
years. hat is the net ad/antage to leasing!
". -$1.)15
#. -$1.2@;
C. $1.)0)
%. $1.0A6
&. $1.057
="L J $0;.6AA - 3$26.5AA4 3>?:2";M. 24 J $1.)0)

AACSB: Analytic
Bloom's: Analysis
Section: "#&#

0). 8reen ?alley 2arms is considering either leasing or 1$ying some new farm e+$ipment.
'he lessor will charge $27.5AA a year for a 5-year lease. 'he p$rchase price is $1)6.AAA. 'he
e+$ipment has a 5-year life after which time it will 1e worthless. 8reen ?alley 2arms $ses
straight-line depreciation. has a )2 percent ta- rate. 1orrows money at 1A percent. and has
s$fficient ta- loss carryo/ers to offset any potential ta-a1le income the firm might ha/e o/er
the ne-t fi/e years. hat is the net ad/antage to leasing!
". $2A.570
#. $21.5A7
C. $22.6);
%. $26.2;)
E. $)1.75)
="L J $1)6.AAA - 3$27.5AA4 3>?:2"1AM. 54 J $)1.75)

AACSB: Analytic
Bloom's: Analysis
Section: "#&#

27-06
00. Cool 'reats is considering either leasing or 1$ying a new freeBer $nit. 'he lessor will
charge $12.6AA a year for a 2-year lease. 'he p$rchase price is $)2.AAA. 'he freeBer has a 2-
year life after which time it is e-pected to ha/e a resale /al$e of $1A.AAA. Cool 'reats $ses
straight-line depreciation. 1orrows money at ; percent. and has s$fficient ta- loss carryo/ers
to offset any potential ta-a1le income the firm might ha/e o/er the ne-t 5 years. hat is the
net ad/antage to leasing!
". $167
#. $);0
C. $57)
%. $71A
E. $@57
="L $)2.AAA - 3$12.6AAK1.A;4 - 3$22.6AAK1.A;
2
4 J $@57

AACSB: Analytic
Bloom's: Analysis
Section: "#&#
'o(ic: Net ad!antage to leasing $SL3 No ta*3 Sal!age

27-07
05. illiamsD >aints is weighing a lease /ers$s a p$rchase of some new machinery. 'he
p$rchase price is $)12.AAA. 'he e+$ipment will 1e depreciated to Bero o/er the 0-year life of
the pro,ect after which time it is e-pected to ha/e a resale /al$e of $76.AAA. 'he firm $ses
straight-line depreciation and can 1orrow money at ; percent. 'he e+$ipment can 1e leased
for $66.AAA a year for 0 years. illiamsD >aints does not e-pect to owe any ta-es for the ne-t
0 years 1eca$se of its net operating losses. hat is the net ad/antage to leasing!
". $@.;06
#. $11.@AA
C. $20.@20
%. $2;.2A7
E. $)7.5)7

AACSB: Analytic
Bloom's: Analysis
Section: "#&#
'o(ic: Net ad!antage to leasing $SL3 No ta*3 Sal!age

27-0;
06. #o1Ds >iBBa is considering either leasing or 1$ying a new o/en. 'he lease payments wo$ld
1e $1A.0AA a year for ) years. 'he p$rchase price is $2@.AAA. 'he e+$ipment has a )-year life
and then is e-pected to ha/e a resale /al$e of $).5AA. #o1Ds >iBBa $ses straight-line
depreciation. 1orrows money at 1A percent. and has a )2 percent ta- rate. hat is the net
". $2A@
#. $2))
C. $20;
D. $271
&. $2@;
"fterta- lease payment J $1A.0AA 31 - A.)24 J $7.A72
Lost depreciation ta- shield J 3$2@.AAAK)4 3A.)24 J $).A@).))
"fterta- sal/age /al$e J $).5AA 31 - A.)24 J $2.);A
%isco$nt rate J A.1A 31 - A.)24 J A.A6;

AACSB: Analytic
Bloom's: Analysis
Section: "#&-
'o(ic: Net ad!antage to leasing $ SL3 Sal!age

27-0@
07. Charleston Marina is considering either leasing or 1$ying some new e+$ipment it needs
for repairing 1oats. 'he lease payments wo$ld 1e $7.2AA a year for ) years. 'he p$rchase
price is $2A.;AA. 'he e+$ipment has a )-year life and then is e-pected to ha/e a resale /al$e
of $0.7AA. 'he firm $ses straight-line depreciation. 1orrows money at ;.5 percent. and has a
)0 percent ta- rate. hat is the net ad/antage to leasing!
". -$1.5A7
#. -$1.222
C. -$@75
%. $0A;
&. $611
"fterta- lease payment J $7.2AA 31 - A.)04 J $0.752
Lost depreciation ta- shield J 3$2A.;AAK)4 3A.)04 J $2.)57.))
"fterta- sal/age /al$e J $0.7AA 31 - A.)04 J $).1A2
%isco$nt rate J A.A;5 31 - A.)04 J A.A561

AACSB: Analytic
Bloom's: Analysis
Section: "#&-
'o(ic: Net ad!antage to leasing $ SL3 Sal!age

27-5A
0;. 2argo =orth is considering the p$rchase of some new e+$ipment costing $112.AAA. 'his
e+$ipment has a 5-year life after which it will 1e worthless. 'he firm $ses straight-line
depreciation and 1orrows f$nds at @ percent interest. 'he companyDs ta- rate is )) percent.
'he firm also has the option of leasing the e+$ipment. hat is the amo$nt of the 1rea9-e/en
lease payment!
A. $2;.6;0
#. $)1.067
C. $)1.775
%. $)).71@
&. $)0.;@7
%epreciation ta- shield J 3$112.AAAK54 3A.))4 J $7.)@2
%isco$nt rate J A.A@31 - A.))4 J A.A6A)
$112.AAA J C3>?:2"6.A)M. 54I C J $26.61A.1A
#rea9-e/en lease payment J 3$26.61A.1A - $7.)@24K31 - A.))4 J $2;.6;0

AACSB: Analytic
Bloom's: Analysis
Section: "#&4
'o(ic: Brea+$e!en lease (ayment

0@. " firm 1orrows money at ;.75 percent. $ses straight-line depreciation. and has a )7
percent ta- rate. 'he firmDs 1rea9-e/en afterta- ann$al lease payment on a machine is
$16.511. 7ow m$ch will the firm ha/e to pay ann$ally to the lessor to lease this machine!
". $16.511
#. $1@.0A;
C. $22.62A
%. $2).@1@
E. $26.2A;
#rea9-e/en lease payment J $16.511K31 - A.)74 J $26.2A;

AACSB: Analytic
Difficulty: Basic
Section: "#&4

27-51
5A. 2ireplaces and More is considering the p$rchase of a deli/ery tr$c9 costing $2@.AAA. 'he
tr$c9 will 1e $sed for 5 years and then it will 1e worthless. 'he financing rate for the p$rchase
is 7.5 percent and the corporate ta- rate is )2 percent. 'he firm $ses straight-line depreciation.
hat is the 1rea9-e/en lease payment amo$nt!
A. $7.10;
#. $7.)1;
C. $7.506
%. $;.A);
&. $;.250
%epreciation ta- shield J 3$2@.AAAK54 3A.)24 J $1.;56
%isco$nt rate J A.A75 31 - A.)24 J 5.1A percent
$2@.AAA J C3>?:2"5.1AM. 54I C J $6.716.;A
#rea9-e/en lease payment J 3$6.716.;A - $1.;564K31 - A.)24 J $7.10;

AACSB: Analytic
Bloom's: Analysis
Section: "#&4

51. <o$r firm is considering either leasing or 1$ying some new e+$ipment. 'he lessor will
charge $1).;AA a year for 0 years sho$ld yo$ decide to lease. 'he p$rchase price is $07.;AA.
'he e+$ipment has a 0-year life after which it is e-pected to ha/e a resale /al$e of $;.0AA.
<o$r firm $ses straight-line depreciation. 1orrows money at 1A percent. and has a )) percent
ta- rate. hat is the afterta- sal/age /al$e of the e+$ipment!
". $5.500
B. $5.62;
C. $5.7A@
%. $5.70;
&. $5.;2A
"fterta- sal/age /al$e J $;.0AA 31 - A.))4 J $5.62;

AACSB: Analytic
Difficulty: Basic
Section: "#&-
'o(ic: Sal!age !alue

27-52
52. EF* &nterprises is considering either leasing or 1$ying some new e+$ipment. 'he lease
payments wo$ld 1e $).;AA a year. 'he p$rchase price is $1@.@AA. 'he e+$ipment has a 6-year
life after which it is e-pected to ha/e a resale /al$e of $2.1AA. <o$r firm $ses straight-line
depreciation. 1orrows money at 11.5 percent. and has a )2 percent ta- rate. hat is the
afterta- sal/age /al$e of the e+$ipment!
". $1.0A7
B. $1.02;
C. $1.071
%. $1.076
&. $1.512
"fterta- sal/age /al$e J $2.1AA 31 - A.)24 J $1.02;

AACSB: Analytic
Difficulty: Basic
Section: "#&-
'o(ic: Sal!age !alue

5). Cross 'own &-press is contemplating the ac+$isition of some new e+$ipment. 'he
p$rchase price is $70.AAA. 'he e+$ipment wo$ld 1e depreciated $sing M"CRC depreciation
o/er years 1 to 0. respecti/ely. 'he e+$ipment wo$ld 1e worthless after that time. 'he
e+$ipment can 1e leased for $1@.1AA a year for 0 years. 'he firm can 1orrow money at @.5
percent and has a 2; percent ta- rate. hat is the incremental ann$al cash flow for year ) if
the company decides to lease the e+$ipment rather than p$rchase it!
A. -$16.;2)
#. -$15.7@7
C. $10.)12
%. $15.7@7
&. $16.;2)
C2) J -1 NO$1@.1AA 31 - A.2;4P L O$70.AAA 3A.10;24 3A.2;4PQ J -$16.;2)

AACSB: Analytic
Bloom's: Analysis
Section: "#&-
'o(ic: Annual cas. flow $ 2AC0S

27-5)
50. :nterstate Cer/ices needs some e+$ipment costing $61.AAA. 'he e+$ipment has a 0-year
life after which it will 1e worthless. 'he firm $ses M"CRC depreciation which allows for
)).)) percent. 00.00 percent. 10.;2 percent. and 7.01 percent depreciation o/er years 1 to 0.
respecti/ely. 'he e+$ipment can 1e leased for $16.6AA a year. 'he firm can 1orrow money at
7.5 percent and has a )6 percent ta- rate. hat is the incremental ann$al cash flow for year 2
if the company decides to lease the e+$ipment rather than p$rchase it!
". -$1;.;@7
#. -$1@.2;6
C. -$1@.);@
%. -$1@.0A7
E. -$2A.);)
C22 J -1 NO$16.6AA 31 - A.)64P L O$61.AAA 3A.00004 3A.)64PQ J -$2A.);)

AACSB: Analytic
Bloom's: Analysis
Section: "#&-
'o(ic: Annual cas. flow $ 2AC0S

55. Morrison :nd$strial 'ool can either lease or 1$y some e+$ipment. 'he lease payments
wo$ld 1e $12.0AA a year. 'he p$rchase price is $)0.@AA. 'he e+$ipment has a )-year life after
which it is e-pected to ha/e a resale /al$e of $5.5AA. 'he firm $ses straight-line depreciation
o/er the assetDs life. 1orrows money at ; percent. and has a )0 percent ta- rate. hat is the
incremental cash flow for year 1 if the company decides to lease the e+$ipment rather than
p$rchase it!
". -$22.0A5
#. -$16.;A5
C. -$12.1)@
%. -$;.1;0
&. -$0.@A5
C21 J -1 NO$12.0AA 31 - A.)04P L O3$)0.@AAK)4 3A.)54PQ J -$12.1)@

AACSB: Analytic
Bloom's: Analysis
Section: "#&-
'o(ic: Annual cas. flow $ SL

27-50
56. " firm can either lease or 1$y some new e+$ipment. 'he lease payments wo$ld 1e
$1@.7AA a year for 0 years. 'he p$rchase price is $72.@AA. 'he e+$ipment has a 0-year life
after which it is e-pected to ha/e a resale /al$e of $).6AA. 'he firm $ses straight-line
depreciation o/er the life of the asset. 1orrows money at 11 percent. and has a )5 percent ta-
rate. 'he company does not e-pect to owe any ta-es for at least 0 years 1eca$se it has
acc$m$lated net operating losses. hat is the incremental cash flow for year ) if the company
decides to lease rather than p$rchase the e+$ipment!
". -$2@.165
#. -$21.;21
C. -$1@.7AA
%. -$1;.55@
&. -$17.6)5
C2) J -1 3$1@.7AA4 J -$1@.7AA

AACSB: Analytic
Difficulty: Basic
Section: "#&#
'o(ic: Annual cas. flow $ SL3 No ta*

57. %aily &nterprises is contemplating the ac+$isition of some new e+$ipment. 'he p$rchase
price is $06.AAA. 'he company e-pects to sell the e+$ipment at the end of year 0 for $2.5AA.
'he firm $ses M"CRC depreciation which allows for )).)) percent. 00.00 percent. 10.;2
percent. and 7.01 percent depreciation o/er years 1 to 0. respecti/ely. 'he e+$ipment can 1e
leased for $12.)AA a year for 0 years. 'he firm can 1orrow money at 7.5 percent and has a )5
percent ta- rate. hat is the incremental ann$al cash flow for year 0 if the company decides
to lease the e+$ipment rather than p$rchase it!
". -$10.0)0
#. -$12.7)0
C. -$1A.;1)
%. -$@.0)0
&. -$;.766
C20 J -1 NO$12.)AA 31 - A.)54P L O$06.AAA 3A.A7014 3A.)54P L O$2.5AA 31 - A.)54PQ J -$1A.;1)

AACSB: Analytic
Bloom's: Analysis
Section: "#&-
'o(ic: Annual cas. flow $ 2AC0S3 Sal!age

27-55
5;. 2ran9Ds "$to Repair can p$rchase a new machine for $1)6.AAA. 'he machine has a 0-year
life and can 1e sold at the end of year 0 for $15.AAA. 2ran9Ds $ses M"CRC depreciation which
allows for )).)) percent. 00.00 percent. 10.;2 percent. and 7.01 percent depreciation o/er
years 1 to 0. respecti/ely. 'he e+$ipment can 1e leased for $)5.@AA a year. 'he firm can
1orrow money at 7.5 percent and has a )2 percent ta- rate. 'he company does not e-pect to
owe any ta-es for at least the ne-t 0 years d$e to net operating losses. hat is the incremental
ann$al cash flow for year 0 if the company decides to lease rather than p$rchase the
e+$ipment!
A. -$5A.@AA
#. -$)5.@AA
C. -$2A.@AA
%. $15.@AA
&. $)5.@AA
C20 J -1 3$15.AAA L $)5.@AA4 J -$5A.@AA

AACSB: Analytic
Bloom's: Analysis
Section: "#&#
'o(ic: Annual cas. flow $ 2AC0S3 No ta*3 Sal!age

Essay Questions

5@. &-plain the differences 1etween p$rchasing an asset and leasing an asset.
ith a p$rchase. the $ser 1$ys an asset from the man$fact$rer with the $ser 1oth owning and
$sing the asset. ith a lease. the lessor 1$ys an asset from the man$fact$rer and then owns
and leases the asset to a lessee. 'he lessee leases and $ses the asset 1$t does not own the asset.
2eed1ac9( Refer to section 27.1

AACSB: 0eflecti!e t.in+ing
Bloom's: Knowledge
Difficulty: Basic
Section: "#&%

27-56
6A. hat are some GgoodG reasons for opting to lease rather than p$rchase an asset!
Ct$dents sho$ld pro/ide reasons similar to those listed in the te-t1oo9. which are(
1. 'a-es may 1e red$ced 1y leasing.
2. 'he lease contract may red$ce $ncertainty.
). 'ransaction costs may 1e lower with leasing.
0. Leasing may re+$ire fewer restricti/e co/enants than sec$red 1orrowing.
5. Leasing may enc$m1er fewer assets than sec$red 1orrowing.

Bloom's: Knowledge
Difficulty: Basic
Section: "#&#

61. &-plain the Gleasing parado-G and also e-plain why leasing is or is not a GBero s$m
gameG.
'he leasing parado- is that. gi/en identical ta- and 1orrowing rates. the lesseeDs cash flows
will 1e e+$al in siBe 31$t opposite in sign4 to those of the lessor. :n other words. leasing wo$ld
1e. at 1est. a 1rea9-e/en proposition for 1oth parties. 'he e-istence of ta- differentials.
differential transaction costs. and different costs of 1orrowing are a few of the reasons that
ma9e leasing worthwhile for 1oth parties. and not ,$st a GBero s$m gameG.

Difficulty: Basic
Section: "#&4

27-57
62. hy might a firm opt to sell and lease1ac9 an asset which it c$rrently owns!
'he firm might opt to sell the asset to create a c$rrent cash inflow from the sale proceeds. 'he
firm might also opt to sell the asset to a lessor if the lessor can realiBe a greater ta- sa/ings
from ownership than that realiBed 1y the c$rrent owner.

Difficulty: Basic
Section: "#&%


6). <o$ wor9 for a n$clear research la1oratory that is contemplating leasing a diagnostic
scanner costs $).5 million and it wo$ld 1e depreciated straight-line to Bero o/er 0 years.
can lease it for $;75.AAA per year for 0 years. "ss$me the ta- rate is )) percent. <o$ can
1orrow at 1A percent 1efore ta-es. hat is the net ad/antage to leasing from yo$r companyDs
standpoint!
". $06;.216
#. $0@1.)1@
C. $516.AA7
%. $5)A.06;
&. $501.707
%epreciation ta- shield J 3$).5AA.AAAK043A.))4 J $2;;.75A
"fterta- lease payment J $;75.AAA 31 - A.))4 J $5;6.25A
HC2 J $2;;.75A L $5;6.25A J $;75.AAA
"fterta- cost of de1t J A.131 - A.))4 J A.A67
="L J $).5AA.AAA - $;75.AAA3>?:2"6.7M. 04 J $516.AA7

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
5OC 6: "#$%
Section: "#&-

27-5;
can lease it for $5AA.AAA per year for 0 years. "ss$me the ta- rate is )0 percent. <o$ can
1orrow at 1A percent 1efore ta-es. hat is the net ad/antage to leasing from the lessorDs
/iewpoint!
A. -$2@A.@;;
#. -$267.)A7
C. -$20;.060
%. $26.22;
&. $1A).511
%epreciation ta- shield J 3$2.AAA.AAAK043A.)04 J $17A.AAA
"fterta- lease payment J $5AA.AAA 31 - A.)04 J $))A.AAA
HC2 J $17A.AAA L $))A.AAA J $5AA.AAA
"fterta- cost of de1t J A.131 - A.)04 J A.A66
="L J -$2.AAA.AAA L $5AA.AAA3>?:2"6.6M. 04 J $2@A.@;;

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
5OC 6: "#$"
Section: "#&-

27-5@
#eca$se of radiation contamination. it will act$ally 1e completely /al$eless in 0 years.
"ss$me the ta- rate is )) percent. <o$ can 1orrow at 6 percent 1efore ta-es. 7ow m$ch
wo$ld the lease payment ha/e to 1e in order for 1oth the lessor and the lessee to 1e indifferent
a1o$t the lease!
". $5AA.AAA
#. $521.@A@
C. $552.2AA
%. $56).)))
E. $576.077
"fterta- de1t cost J A.A631 - A.))4 J A.A0A2
="L J A J $2.AAA.AAA - HC2 3>?:2"0.A2M. 04I HC2 J $551.2)@.;2
%epreciation ta- shield J 3$2.AAA.AAAK04 3A.))4 J $165.AAA
"fterta- lease payment J $551.2)@.;2 - $165.AAA J $);6.2)@.;2
#rea9e/en lease payment J $);6.2)@.;2K31 - A.))4 J $576.077

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
5OC 6: "#$,
Section: "#&-

27-6A
can lease it for $6AA.AAA per year for 0 years. "ss$me yo$r company does not contemplate
paying ta-es for the ne-t se/eral years. <o$ can 1orrow at 6 percent 1efore ta-es. hat is the
net ad/antage to leasing from yo$r companyDs standpoint!
". -$;2.711
B. -$7@.A6)
C. -$21.0A@
%. -$2A.;1;
&. -$1;.)15
Cost of de1t J A.A6
"nn$al cost of leasing J $6AA.AAA
="L J $2.AAA.AAA -$6AA.AAA3>?:2"6M. 04 J -$7@.A6)

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
5OC 6: "#$1
Section: "#&-

27-61
scanner costs $) million and it wo$ld 1e depreciated straight-line to Bero o/er 0 years.
can lease it for $75A.AAA per year for 0 years. "ss$me the ta- rate is )1 percent. <o$ can
1orrow at ; percent 1efore ta-es. <o$r company does not e-pect to pay ta-es for the ne-t
se/eral years. 1$t the leasing company will pay ta-es. hat range of lease payments will
allow the lease to 1e profita1le for 1oth parties!
". $@A0.A26 to $@A5.12)
#. $@A0.A26 to $@A5.0;1
C. $@A0.A26 to $@A5.762
%. $@A5.12) to $@A6.017
&. $@A5.12) to $@A6.;25
"fterta- cost of de1t J A.A;31 - A.)14 J A.A552
="L J A J $).AAA.AAA - HC2 3>?:2"5.52M. 04I HC2 J $;56.27;.27
%epreciation ta- shield J 3$).AAA.AAAK04 3A.)14 J $2)2.5AA
"fterta- lease payment J $;56.27;.27 - $2)2.5AA J $62).77;.27
#rea9e/en lease payment J $62).77;.27K31 - A.)14 J $@A0.A26
Cince the lessor pays ta-es. it will 1rea9 e/en with a payment of $@A0.A26.
2or the lessee. we need to calc$late the 1rea9e/en lease payment which res$lts in a Bero ="L.
="L J A J $).AAA.AAA - >M' 3>?:2";M. 04I >M' J $@A5.762
>ayment range J $@A0.A26 to $@A5.762

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
5OC 6: "#$-
Section: "#&-
'o(ic: Lease (ayment

27-62
6;. 'he ildcat Hil Company is trying to decide whether to lease or 1$y a new comp$ter-
$se the system to stay competiti/eI it will pro/ide $;5A.AAA in ann$al preta- cost sa/ings. 'he
system costs $; million and will 1e depreciated straight-line to Bero o/er 5 years. ildcatDs
ta- rate is )1 percent. and the firm can 1orrow at ; percent. Lam1ert Leasing Company has
offered to lease the drilling e+$ipment to ildcat for payments of $2.A0A.AAA per year.
Lam1ertDs policy is to re+$ire its lessees to ma9e payments at the start of the year. hat is the
ma-im$m lease payment that wo$ld 1e accepta1le to the company!
". $1.;@2.0@7
B. $ 1.;@).2)1
C. $1.@A0.5A6
%. $1.@A6.)1;
&. $1.@11.072
'he preta- cost sa/ings are not rele/ant to the lease /ers$s 1$y decision since the firm will
definitely $se the e+$ipment and realiBe the sa/ings regardless of the financing choice made.
%epreciation ta- shield lost J 3$;.AAA.AAAK54 3A.)14 J $0@6.AAA
"fterta- de1t cost J A.A; 31 - A.)14 J A.A552
="L J A J $;.AAA.AAA - R 31.A5524 3>?:2"5.52M. 54 - $0@6.AAA3>?:2"5.52M. 54I
R J $1.)A6.)2@.67
>reta- lease payment J $1.)A6.)2@.67K31 - A.)14 J $1.;@).2)1

AACSB: Analytic
Bloom's: Analysis
5OC 6: "#$#
Section: "#&-
'o(ic: Lease or buy

27-6)
6@. 'he ildcat Hil Company is trying to decide whether to lease or 1$y a new comp$ter-
$se the system to stay competiti/eI it will pro/ide $55A.AAA in ann$al preta- cost sa/ings. 'he
system costs $) million and will 1e depreciated straight-line to Bero o/er 0 years. :t is
estimated that the e+$ipment will ha/e an afterta- resid$al /al$e of $5AA.AAA at then end of
the lease. ildcatDs ta- rate is )1 percent. and the firm can 1orrow at 1A percent. Lam1ert
Leasing Company has offered to lease the drilling e+$ipment to ildcat for payments of
$@0A.AAA per year. Lam1ertDs policy is to re+$ire its lessees to ma9e payments at the start of
the year. hat is the ma-im$m lease payment that wo$ld 1e accepta1le to the company!
A. $72@.@)2
#. $7)0.515
C. $70;.2AA
%. $751.606
&. $762.@)7
%epreciation ta- shield lost J 3$).AAA.AAAK04 3A.)14 J $2)2.5AA
"fterta- de1t cost J A.1 31 - A.)14 J A.A6@
="L J A J $).AAA.AAA - R 31.A6@4 3>?:2"6.@M. 04 - $2)2.5AA3>?:2"6.@M. 04 - $5AA.AAAK1.A6@
0
I
R J $5A).652.75
>reta- lease payment J $5A).652.75K31 - A.)14 J $72@.@)2

AACSB: Analytic
Bloom's: Analysis
5OC 6: "#$7
Section: "#&4
'o(ic: Leasing and sal!age !alue

27-60
7A. 'he ildcat Hil Company is trying to decide whether to lease or 1$y a new comp$ter-
$se the system to stay competiti/eI it will pro/ide $1.2 million in ann$al preta- cost sa/ings.
'he system costs $6.7 million and will 1e depreciated straight-line to Bero o/er 0 years.
ildcatDs ta- rate is )5 percent. and the firm can 1orrow at 11 percent. Lam1ert Leasing
Company has offered to lease the drilling e+$ipment to ildcat for payments of $1.75A.AAA
per year. Lam1ertDs policy is to re+$ire its lessees to ma9e payments at the start of the year.
Lam1ert re+$ires ildcat to pay a $27A.AAA sec$rity deposit at the inception of the lease.
hat is the ="L of leasing the e+$ipment!
". $522.0A;
B. $501.2;7
C. $55A.)1;
%. $561.;2;
&. $560.71@
%epreciation ta- shield lost J 3$6.7AA.AAAK04 3A.)54 J $5;6.25A
"fterta- lease payment J $1.75A.AAA 31 - A.)54 J $1.1)7.5AA
"fterta- de1t cost J A.11 31 - A.)54 J A.A715
'he sec$rity deposit is a cash o$tflow at the 1eginning of the lease and a cash inflow at the
end of the lease when it is ret$rned.
="L J $6.7AA.AAA - $27A.AAA - $1.1)7.5AA - $1.1)7.5AA 3>?:2"7.15M .)4 -
$5;6.25A3>?:2"7.15M. 04 L $27A.AAAK1.A715
0
="L J $501.2;7

AACSB: Analytic
Bloom's: Analysis
5OC 6: "#$8
Section: "#&-
'o(ic: De(osits in leasing

27-65
71. "n asset costs $02A.AAA and will 1e depreciated in a straight-line manner o/er its )-year
life. :t will ha/e no sal/age /al$e. 'he corporate ta- rate is )2 percent. and the appropriate
interest rate is ; percent. hat lease payment amo$nt will ma9e the lessee and the lessor
e+$ally well off!
". $105.717.A;
#. $150.101.11
C. $157.77;.A)
D. $162.7@5.)0
&. $165.A25.5A
%epreciation ta- shield J 3$02A.AAAK)4 3A.)24 J $00.;AA
"fterta- de1t cost J A.A;31 - A.)24 J A.A500
="L J A J $02A.AAA - >M' 31 - A.)24 3>?:2"5.00M.)4 - $00.;AA3>?:2"5.00M.)4I >M' J
$162.7@5.)0

AACSB: Analytic
Bloom's: Analysis
5OC 6: "#$%9
Section: "#&-
'o(ic: Setting t.e lease (rice

27-66
72. "$tomo1iles are often leased. and se/eral terms are $ni+$e to a$to leases. C$ppose yo$
are considering leasing a car. 'he price yo$ and the dealer agree on for the car is $)2.AAA.
'his is the 1ase capitaliBed cost. Hther costs added to the capitaliBed cost price incl$de the
ac+$isition 31an94 fee. ins$rance. or e-tended warranty. "ss$me these costs are $)@A.
CapitaliBation cost red$ctions incl$de any down payment. credit of trade-in. or dealer re1ate.
"ss$me yo$ ma9e a down payment of $2.6AA. and there is no trade-in or re1ate. :f yo$ dri/e
11.AAA miles per year. the lease-end resid$al /al$e for this car will 1e $1;.7AA after three
years. 'he lease factor. which is the interest rate on the loan. is the ">R of the loan di/ided 1y
2.0AA. 3eDre not really s$re where the 2.0AA comes from. either.4 'he lease factor the dealer
+$otes yo$ is A.AA2A;. 'he monthly lease payment consists of three partsI a depreciation fee.
a finance fee. and sales ta-. 'he depreciation fee is the net capitaliBation cost min$s the
resid$al /al$e. di/ided 1y the term of the lease. 'he net capitaliBation cost is the cost of the
car min$s any cost red$ctions pl$s any additional costs. 'he finance fee is the net
capitaliBation cost pl$s the resid$al. times the money factor. and the monthly sales ta- is
simply the monthly lease payments times the ta- rate. hat is yo$r monthly lease payment
for a )6-month lease if the sales ta- is ; percent!
". $)2@.A;
#. $)02.6)
C. $)7@.;2
%. $0A2.20
E. $001.6)
=et capitaliBed cost J $)2.AAA L $)@A - $2.6AA J $2@.7@A
%epreciation charge J 3$2@.7@A - $1;.7AA4K)6 J $)A;.A6
2inance charge J 3$2@.7@A L $1;.7AA4 3A.AA2A;4 J $1AA.;6
'a-es J 3$)A;.A6 L $1AA.;64 3A.A;4 J $)2.71
Lease payment J $)A;.A6 L $1AA.;6 L $)2.71 J $001.6)

AACSB: Analytic
Bloom's: Analysis
5OC 6: "#$%%
Section: "#&-
'o(ic: Automobile lease (ayment

27-67

Chapter 27 - Leasing

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