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Exam 16: Lease Financing: Concepts and Techniques

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Question 41

True/False

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If the present value of the cost of leasing an asset exceeds the present value of the cost of purchasing it, the company should purchase the asset

A) True
B) False

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Question 42

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Who assumes the risk of a leased asset's salvage value?

A) Neither the lessee nor the lessor assumes this type of risk since the salvage value is known with certainty
B) The lessee
C) The lessor
D) The lessee and the lessor share the risk equally

E) A) and D)
F) A) and C)

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Question 43

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After negotiations that involved Flightrax Limited, Nell Computers and Techfinance Leasing, itwas agreed that Techfinance Leasing would purchase computers from Nell worth $1.1 million to bedelivered to and used by Flightrax. This contractual agreement between Flightrax and Techfinance is an example of a direct lease.

What is the main reason for using a higher discount rate for the salvage value of an asset than for other cash flows?

Assume you have just calculated the present value of the tax shield from CCA for a lessee to be $21552. If the tax rate you use in this calculation was increased by 10% (not 10 percentage points) , howwould the present value of the tax shield from CCA change?

If the present value of the cost of leasing equals the present value of purchasing the asset, the annual lease rate (payment) is set so that the lessor would earn a rate of return on the lease that is

From the lessee's point of view, if the Net Present Value of a lease equals zero, then...

Kelvin Limited, a manufacturing company in Regina, is considering acquiring a piece of land on which to build its new robotics-based production facility, all with a combined market value of $6500 000. If Kelvin ends up financing the acquisition with a lease, SaskLease Limited has limited its involvement to$1 300 000 while a bank is willing to lend Kelvin the remaining $5 200 000. What type of lease would this arrangement imply?

The lessor is the party to the leasing contract who, under the lease contract, owns the asset and receives the lease payments.

With a conditional sales arrangement, the purchaser of an asset is the owner of the asset, not a lessee

Why is the salvage value of an asset not included in the calculation of the present value of a lease?

What is the impact on the lease payment charged by the lessor if maintenance and insurance costsare included in the payment?

Leasing companies in Canada cannot be subsidiaries of Life Insurance Companies

What is a capitalized lease?

Thornby Consolidated wants to lease new office furniture from West Coast Leasing. The cost of thefurniture is $100 000 and it has an expected life of 6 years, which is also the term of the financiallease. West Coast's cost of capital is 5% and its tax rate is 45%. The combined Present Value of the tax shield from CCA, the salvage and the tax shield lost due to salvage is $39 919. What is the minimum annual lease payment West Coast Leasing can set and earn its required rate of return?

Advantages of leasing from the lessee's perspective include all of the following EXCEPT

Panorama Corporation has made an offer to Wideview Brothers to lease or purchase an asset that has a useful life of 6 years. The asset sells for $122 000 and has a CCA rate of 20%. The asset's expected salvage value is $16 000 at the end of its useful life. Panorama is willing to guarantee a6-year bank loan at a 8% interest rate, which is the best rate available, to cover the purchase price. As an alternative to a bank-financed purchase, Panorama would consider a 6-year lease of Wideview's asset. The annual lease payment would be $ 25 666, with the first payment due uponsigning the lease agreement. Wideview's analysis concludes that it makes economic sense to acquire the machinery. What is the present value of Panorama's leasing cost in this case?

Which of a firm's rates listed below is the appropriate one to use to evaluate the lease-or-purchase question?

___________lease is a contractual arrangement whereby the lessee agrees to make periodic payments to the lessor for five or fewer years for an asset's services. This type of lease may also be canceled at the option of the lessee.

The tax shield from CCA benefits companies with lower tax rates more than companies with higher tax rates