Question

Knight Motors is considering either leasing or buying some new equipment. The lease payments would be $14,500 a year for 3 years. The purchase price is $52,000. The equipment has a 3-year life and then is expected to have a resale value of $12,000. Knight Motors uses straight-line depreciation, borrows money at 9 percent, and has a 35 percent tax rate. What is the net advantage to leasing?

A) -$1,611 B) -$2,212 C) -$2,742 D) $3,529 E) $3,898

Answer #1

Option-1 Leasing | |||||

Annual Lease rent | -14500 | ||||

Less: tax rate @ 35% | 5075 | ||||

After tax Iease rent | -9425 | ||||

Multiply: Annuity PVF | 2.53129 | ||||

Present value of outflows | -23857.4 | ||||

Option-2 Purchase: | |||||

Tax shield in dep | 6066.667 | ||||

(52000/3*35%) | |||||

Multiply: Annuity factor | 2.53129 | ||||

Present value of tax shield | 15356.49 | ||||

Present value of Salvage | 9266.208 | ||||

(12000*0.772184) | |||||

Initial Investment | -52000 | ||||

Present value of purchase | -27377.3 | ||||

Net Benefit of leasing = 27377.3-23857.4 = 3519.90 | |||||

Answer is D. $ 3529. | |||||

The difference is due to rounding off. | |||||

Cayman Productions is considering either leasing or buying some
new underwater photographic equipment. The lessor charges $26,900 a
year for a 2-year lease, starting year 1. The purchase price is
$48,600. The equipment has a 2-year life after which time it will
be worthless. Cayman uses straight-line depreciation, borrows money
at 8 percent, and has sufficient tax loss carryovers to offset any
taxes which otherwise might be owed for the next 4 years. What is
the NPV of the lease?...

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?
Multiple Choice
−$5,306
−$6,234
−$4,471
−$4,407
−$5,512

Fargo North is considering the purchase of some new equipment
costing $75,000. This equipment has a 2-year life after which time
it will be worthless. The firm uses straight-line depreciation and
borrows funds at a 10 percent rate of interest. The company's tax
rate is 34 percent. The firm also has the option of leasing the
equipment.
What is the amount of the break-even lease payment?
Can I calculate this without using Excel?

Greencore Corporation is considering leasing a new equipment.
The lease lasts for 8 years. The lease calls for 8 payments of
$225,000 per year with the first payment occurring immediately. The
equipment would cost $1,480,000 to buy and would be straight-line
depreciated to a zero salvage value over 8 years. The actual
salvage value is negligible because of technological obsolescence.
The firm can borrow at a rate of 6%. The corporate tax rate is 25%.
What is the after-tax cash...

Spectrum Corporation is considering leasing a new equipment. The
lease lasts for 8 years. The lease calls for 8 payments of $142,000
per year with the first payment occurring immediately. The
equipment would cost $1,020,000 to buy and would be straight-line
depreciated to a zero salvage value over 8 years. The actual
salvage value is negligible because of technological obsolescence.
The firm can borrow at a rate of 6%. The corporate tax rate is 25%.
What is the after-tax cash...

Hatwick Technology is considering leasing a new equipment. The
lease lasts for 5 years. The lease calls for 5 payments of $10,200
per year with the first payment occurring immediately. The
equipment would cost $44,000 to buy and would be straight-line
depreciated to a zero salvage value over 5 years. The actual
salvage value is negligible because of technological obsolescence.
The firm can borrow at a rate of 6%. The corporate tax rate is 34%.
What is the after-tax cash...

Airgas Corporation is considering leasing a new equipment. The
lease lasts for 5 years. The lease calls for 5 payments of $40,000
per year with the first payment occurring immediately. The
equipment would cost $185,000 to buy and would be straight-line
depreciated to a zero salvage value over 5 years. The actual
salvage value is negligible because of technological obsolescence.
The firm can borrow at a rate of 6%. The corporate tax rate is 25%.
What is the NPV of...

Hatwick Technology is considering leasing a new equipment. The
lease lasts for 5 years. The lease calls for 5 payments of $10,200
per year with the first payment occurring immediately. The
equipment would cost $44,000 to buy and would be straight-line
depreciated to a zero salvage value over 5 years. The actual
salvage value is negligible because of technological obsolescence.
The firm can borrow at a rate of 6%. The corporate tax rate is 34%.
What is the NPV of...

Maxstor Corporation is considering leasing an equipment from
CapLease. The equipment costs $8,130,000, and it would be
depreciated straight-line to zero over six years. The equipment
will have zero salvage value in six years. The company can lease it
for $1,730,000 per year for six years. Assume that the tax rate is
25 percent. Maxtor can borrow at 8.4 percent before taxes. What is
the net advantage of lease relative to purchase (NAL)? $135,401.25
$141,206.70 $128,833.46 $159,312.11 $111,490.39

Airgas Corporation is considering leasing a new equipment. The
lease lasts for 5 years. The lease calls for 5 payments of $40,000
per year with the first payment occurring immediately. The
equipment would cost $185,000 to buy and would be straight-line
depreciated to a zero salvage value over 5 years. The actual
salvage value is negligible because of technological obsolescence.
The firm can borrow at a rate of 6%. The corporate tax rate is 25%.
What is the after-tax cash...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 6 minutes ago

asked 30 minutes ago

asked 38 minutes ago

asked 43 minutes ago

asked 52 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago