Your firm is considering leasing a new black box. The lease lasts for 3 years.

The lease calls for 4 payments of $100 per year with the first payment occurring at lease inception. The black box would cost $360 to buy and would qualify for a CCA rate of 30%. It would have no value in 3 years. The firm can borrow at 6%, and the corporate tax rate is 30%.

Your Results:
The correct answer for each question is indicated by a .

INCORRECT Concerning financial leases, which of the following statements is not correct? A)Generally, financial leases cannot be canceled. B)Generally, financial leases are fully amortized. C)Generally, maintenance and service is provided. D)Generally, financial leases are long-term. E)All of the above are generally correct. Feedback: See p. 593

INCORRECT Lease payments may not be deducted by the lessee for tax purposes if: A)the lease payments do not decline rapidly over the life of the lease. B)the lessee has an option to acquire the asset for a nominal amount at the end of the lease. C)the lease term is for 25 years. D)the lease agreement states that additional debt capital can be raised. E)None of the above. Feedback: See p. 596

CORRECT

From the lessee's point of view, which of the following is not a direct cost associated with leasing? A)The foregone depreciation tax shield. B)The after-tax lease payment. C)The purchase price of the asset. D)Debt displacement. E)All of the above are costs associated with leasing. Feedback: See p. 596-598

CORRECT

In valuing the lease versus purchase option, an irrelevant cashflow is: A)tax shield from depreciation. B)investment outlay for the equipment. C)net operating cashflows associated with the new machine. D)all of the above are not irrelevant. E)all of the above are irrelevant. Feedback: See p. 597-598

INCORRECT What is the appropriate discount rate for valuing the lease? A)8.6%. B)7.8%. C)6.0%. D)4.2%.

E)None of the above. Feedback: Rationale:Discount Rate A.T. = 6(1-.3) = 4.2%

INCORRECT What is the after-tax cash flow in year 0 from the lessor's point of view? A)$360. B)$273.80. C)$293.80. D)$330. E)None of the above. Feedback: Rationale:360 100 100(.3) + (360/2)(.3)(.4) = -273.80

INCORRECT What is the NPV of the lease? A)$ 360. B)-$ 344.45. C)-$34.45. D)0. E)None of the above. Feedback: Rationale:NPV = 360 [360(.3)(.3)(1.021)/[(.042+.3)(1.042)] 100(1 .3) PVIFA(4.2%,4)(1.042) = 360 704.45 = - 344.45

INCORRECT What is the maximum lease payment that you would be willing to make? A)$ 92.13. B)$ 61.42. C)$ 30.71. D)$130.71. E)None of the above. Feedback: Rationale: Set NPV = 0 and solve for L. 0 = 360 440.93 L(1-.3)PVIFA(4.2%,4)(1.042)