Question 1

Carmichael Cleaners needs a new steam finishing machine that costs $100,000.The company is evaluating whether it should lease or purchase the machine.The equipment falls into the MACRS 3-year class,and it would be used for 3 years and then sold,because the firm plans to move to a new facility at that time.The estimated value of the equipment after 3 years is $30,000.A maintenance contract on the equipment would cost $3,000 per year,payable at the beginning of each year.Alternatively,the firm could lease the equipment for 3 years for a lease payment of $29,000 per year,payable at the beginning of each year.The lease would include maintenance.The firm is in the 20% tax bracket,and it could obtain a 3-year simple interest loan,interest payable at the end of the year,to purchase the equipment at a before-tax cost of 10%.If there is a positive Net Advantage to Leasing the firm will lease the equipment.Otherwise,it will buy it.What is the NAL? (Note: Assume MACRS rates for Years 1 to 4 are 0.3333,0.4445,0.1481,and 0.0741.)

Accepted Answer

A)   $5,734
B)   $6,023
C)   $6,324
D)   $6,640
E)   $6,972F) None of the above
G) B) and E)

Question 2

From the lessee viewpoint,the riskiness of the cash flows,with the possible exception of the residual value,is about the same as the riskiness of the lessee's

Accepted Answer

A)   capital budgeting project cash flows.
B)   debt cash flows.
C)   pension fund cash flows.
D)   sales.
E)   equity cash flows.F) B) and E)
G) A) and B)

Question 3

To finance some manufacturing tools it needs for the next 3 years,Waldrop Corporation is considering a leasing arrangement.The tools will be obsolete and worthless after 3 years.The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life.It can borrow $4,800,000,the purchase price,at 10% and buy the tools,or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them.The loan obtained from the bank is a 3-year simple interest loan,with interest paid at the end of the year.The firm's tax rate is 40%.Annual maintenance costs associated with ownership are estimated at $240,000,but this cost would be borne by the lessor if it leases.What is the net advantage to leasing (NAL) ,in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands.)

Accepted Answer

A)   $96
B)   $106
C)   $112
D)   $117
E)   $123F) C) and E)
G) B) and C)

Exam 19: Lease Financing

From the lessee viewpoint,the riskiness of the cash flows,with the possible exception of the residual value,is about the same as the riskiness of the lessee's

Correct Answer
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Correct Answer
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Correct Answer
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Exam 19: Lease Financing

From the lessee viewpoint,the riskiness of the cash flows,with the possible exception of the residual value,is about the same as the riskiness of the lessee's

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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