Chap 027

Chapter 27 - Leasing
Chapter 27 Leasing
Multiple Choice Questions
1. Ron leases a car from Uptown Motors and pays $225 a month as a lease payment. one of the following terms applies to Ron! ". lessee #. lessor C. g$arantor %. tr$stee &. manager
hich
2. 'he party who owns a leased asset is called the( ". lessee. #. lessor. C. g$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+$ipment is 7 years. hich type of lease does *ate ha/e! ". open #. straight C. operating %. financial &. ta--oriented
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0. "lfredo has a non-cancela1le. fi/e year lease on an ind$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+$ipment. hich type of lease arrangement is this! ". le/eraged lease #. sale and lease1ac9 C. operating lease %. ta--oriented lease &. straight lease
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;. <o$ 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$rer. :::. owns the asset. :?. is generally an independent leasing company. ". :: and ::: only #. : and :? only C. ::: and :? only %. ::. :::. and :? only &. :. ::. :::. and :?
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11. "n operating lease has which of the following characteristics! :. lessee has responsi1ility for the maintenance and ins$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 :?. $ses the asset ". : and :? only #. :: and ::: only C. :. ::. and :? only %. ::. :::. and :? only &. :. ::. :::. and :?
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15. " firm that is /ery cyclical in nat$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
16. " financial lease( :. 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 $pon lease payments.
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1@. :f a firm enters a sale and lease1ac9 agreement. then( :. the lessee will 1enefit from an immediate cash inflow. ::. 1oth the lessor and the lessee may 1enefit if the lessor can 1enefit more from the ta1enefits of ownership than can the lessee. :::. the lease a$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.
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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 tarate :?. 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$rn on short-term assets.
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27. hich one of the following statements is correct concerning ta-es and leasing! ". 'a--deferral is a legitimate reason for leasing. #. 'he lessee sho$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 tarate 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 aftertalease payment! ". $).2;6.AA #. $7.)10.AA C. $7.;62.55 %. $;.0A6.16 &. $1A.@2;.6A
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)1. Eamestown C$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$nds is @ percent and the tarate is )0 percent. 'he e+$ipment can 1e leased for $2).;AA a year. hat is the amo$nt of the aftertalease 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+$ipment. 'he e+$ipment costs $51.AAA. has a 5-year life. and will 1e worthless after the 5 years. 'he company has a tarate of )0 percent. a cost of 1orrowed f$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 tarate 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 %. $;.))) &. $@.AAA
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)0. ?alDs >iBBeria is contemplating the ac+$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 $12.5AA a year. 'he firm can 1orrow money at ; percent and has a )5 percent tarate. hat is the amo$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 $20.6AA a year. 'he firm can 1orrow money at @.5 percent and has a )0 percent tarate. hat is the amo$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 &. $062.;0
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)7. >recision 'ool is trying to decide whether to lease or 1$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 tarate 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 $ses M"CRC depreciation which allows for )).)) percent. 00.00 percent. 10.;2 percent. and 7.01 percent depreciation o/er years 1 to 0. respecti/ely. "fter that time. the e+$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 tarate. 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 tarate. hat is the net ad/antage to leasing! ". $1.7;@ #. $1.;62 C. $1.@22 %. $2.A;7 &. $2.127
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0A. #a-ter Contractors is e/al$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 tarate. '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$c9 is ) years. 'he corporate tarate is )0 percent. 'he company does not e-pect to owe any ta-es for the ne-t se/eral years d$e to acc$m$lated net operating losses. 'he firm $ses straight-line depreciation. hat is the net ad/antage to leasing! ". -$1.71A #. -$;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 &. $1.057
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0). 8reen ?alley 2arms is considering either leasing or 1$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 $ses straight-line depreciation. has a )2 percent tarate. 1orrows money at 1A percent. and has s$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 $)2.AAA. 'he freeBer has a 2year life after which time it is e-pected to ha/e a resale /al$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 &. $)7.5)7
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06. #o1Ds >iBBa is considering either leasing or 1$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 tarate. hat is the net ad/antage to leasing! ". $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 tarate. 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 tarate 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
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0@. " firm 1orrows money at ;.75 percent. $ses straight-line depreciation. and has a )7 percent tarate. 'he firmDs 1rea9-e/en afterta- ann$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 tarate 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 $ses straight-line depreciation. 1orrows money at 1A percent. and has a )) percent tarate. hat is the afterta- sal/age /al$e of the e+$ipment! ". $5.500 #. $5.62; C. $5.7A@ %. $5.70; &. $5.;2A
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52. EF* &nterprises is considering either leasing or 1$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 $ses straight-line depreciation. 1orrows money at 11.5 percent. and has a )2 percent tarate. hat is the afterta- sal/age /al$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 $sing M"CRC depreciation which allows for )).)) percent. 00.00 percent. 10.;2 percent. and 7.01 percent depreciation o/er years 1 to 0. respecti/ely. 'he e+$ipment wo$ld 1e worthless after that time. 'he e+$ipment can 1e leased for $1@.1AA a year for 0 years. 'he firm can 1orrow money at @.5 percent and has a 2; percent tarate. hat is the incremental ann$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 $16.6AA a year. 'he firm can 1orrow money at 7.5 percent and has a )6 percent tarate. hat is the incremental ann$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 $ses straight-line depreciation o/er the assetDs life. 1orrows money at ; percent. and has a )0 percent tarate. hat is the incremental cash flow for year 1 if the company decides to lease the e+$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 $ses straight-line depreciation o/er the life of the asset. 1orrows money at 11 percent. and has a )5 percent tarate. 'he company does not e-pect to owe any ta-es for at least 0 years 1eca$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 $12.)AA a year for 0 years. 'he firm can 1orrow money at 7.5 percent and has a )5 percent tarate. hat is the incremental ann$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 $)5.@AA a year. 'he firm can 1orrow money at 7.5 percent and has a )2 percent tarate. 'he company does not e-pect to owe any ta-es for at least the ne-t 0 years d$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 tarate 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$clear research la1oratory that is contemplating leasing a diagnostic scanner 3leasing is a /ery common practice with e-pensi/e. high-tech e+$ipment4. 'he scanner costs $2 million and it wo$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 $5AA.AAA per year for 0 years. "ss$me the tarate 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; &. $1A).511
65. <o$ 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 $2 million and it wo$ld 1e depreciated straight-line to Bero o/er 0 years. #eca$se of radiation contamination. it will act$ally 1e completely /al$eless in 0 years. "ss$me the tarate 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).))) &. $576.077
66. <o$ 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 $2 million and it wo$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 $6AA.AAA per year for 0 years. "ss$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; &. -$1;.)15
27-2A
67. <o$ 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 $) million and it wo$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 $75A.AAA per year for 0 years. "ss$me the tarate 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$terassisted drilling system for its oil e-ploration 1$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 $; million and will 1e depreciated straight-line to Bero o/er 5 years. ildcatDs tarate is )1 percent. and the firm can 1orrow at ; percent. Lam1ert Leasing Company has offered to lease the drilling e+$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$terassisted drilling system for its oil e-ploration 1$siness. Management has decided that it m$st $se the system to stay competiti/eI it will pro/ide $55A.AAA in ann$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 $5AA.AAA at then end of the lease. ildcatDs tarate is )1 percent. and the firm can 1orrow at 1A percent. Lam1ert Leasing Company has offered to lease the drilling e+$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$terassisted drilling system for its oil e-ploration 1$siness. Management has decided that it m$st $se the system to stay competiti/eI it will pro/ide $1.2 million in ann$al preta- cost sa/ings. 'he system costs $6.7 million and will 1e depreciated straight-line to Bero o/er 0 years. ildcatDs tarate is )5 percent. and the firm can 1orrow at 11 percent. Lam1ert Leasing Company has offered to lease the drilling e+$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 tarate 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 $1;.7AA after three years. 'he lease factor. which is the interest rate on the loan. is the ">R of the loan di/ided 1y 2.0AA. 3 eDre not really s$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 tarate. 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 $225 a month as a lease payment. one of the following terms applies to Ron! A. lessee #. lessor C. g$arantor %. tr$stee &. manager Refer to section 27.1
hich
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$% Section: "#&% 'o(ic: Lessee
2. 'he party who owns a leased asset is called the( ". lessee. B. lessor. C. g$arantor. %. tr$stee. &. manager. Refer to section 27.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$% Section: "#&% 'o(ic: Lessor
27-20
). *ate is leasing some e+$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+$ipment is 7 years. hich type of lease does *ate ha/e! ". open #. straight C. operating %. financial &. ta--oriented Refer to section 27.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$% 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$rances related to this lease. hich type of lease does "lfredo ha/e on this sewing machine! ". open #. straight C. operating D. financial &. ta--oriented Refer to section 27.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$% Section: "#&% 'o(ic: )inancial lease
27-25
5. " financial lease in which the lessor is the owner for ta- p$rposes is called a3n4 55555 lease. ". open #. straight C. operating D. ta--oriented &. ta--e-empt Refer to section 27.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$% 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$al lease &. straight lease Refer to section 27.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$% 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+$ipment. hich type of lease arrangement is this! ". le/eraged lease B. sale and lease1ac9 C. operating lease %. ta--oriented lease &. straight lease Refer to section 27.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$% 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$rchasing. Refer to section 27.5
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$, 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. Refer to section 27.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$% 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$rer. :::. owns the asset. :?. is generally an independent leasing company. ". :: and ::: only #. : and :? only C. ::: and :? only %. ::. :::. and :? only &. :. ::. :::. and :? Refer to section 27.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$% 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 Refer to section 27.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$% Section: "#&% 'o(ic: O(erating lease
12. " financial lease( A. is generally called a capital lease 1y acco$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. Refer to section 27.1
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. Refer to section 27.1
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 :?. $ses the asset ". : and :? only #. :: and ::: only C. :. ::. and :? only %. ::. :::. and :? only &. :. ::. :::. and :? Refer to section 27.1
27-)A
15. " firm that is /ery cyclical in nat$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 Refer to section 27.1
AACSB: N/A Bloom's: Com(re.ension Difficulty: Basic Learning Ob ecti!e: "#$% Section: "#&% 'o(ic: O(erating lease
16. " financial lease( :. is generally a f$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 Refer to section 27.1
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+$ipment and depreciate it straight-line o/er the life of the asset. Refer to section 27.1
AACSB: N/A Bloom's: Com(re.ension Difficulty: Basic Learning Ob ecti!e: "#$% 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 $pon lease payments. Refer to section 27.1
27-)2
1@. :f a firm enters a sale and lease1ac9 agreement. then( :. the lessee will 1enefit from an immediate cash inflow. ::. 1oth the lessor and the lessee may 1enefit if the lessor can 1enefit more from the ta1enefits of ownership than can the lessee. :::. the lease a$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 Refer to section 27.1
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. Refer to section 27.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$% Section: "#&" 'o(ic: O(erating lease
27-))
21. hich one of the following will classify a lease as a capital lease for acco$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 $1AA.AAA. Refer to section 27.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$% 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$e of the lease agreement at the time the agreement was made. Refer to section 27.2
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$% 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 Learning Ob ecti!e: "#$% Section: "#&, 'o(ic: Leases and t.e /0S
20. 'he :RC will disallow any lease that( ". has a lease term in e-cess of three years. #. has a term that is less than one-half of the economic life of the asset. C. in/ol/es a lessee that has net operating losses. D. appears to e-ist solely to defer ta-es. &. red$ces the com1ined ta- o1ligations of the lessor and the lessee. Refer to section 27.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$% Section: "#&, 'o(ic: 'a*es and leasing
27-)5
25. 'he incremental cash flows of leasing consider which of the following! :. cost of the asset ::. lease payment amo$nt :::. applica1le tarate :?. ann$al depreciation e-pense ". : and ::: only #. :: and :? only C. ::. :::. and :? only %. :. ::. and :? only E. :. ::. :::. and :? Refer to section 27.0
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$, 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. Refer to section 27.0
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$, Section: "#&1 'o(ic: Lease discount rate
27-)6
27. hich one of the following statements is correct concerning ta-es and leasing! A. 'a--deferral is a legitimate reason for leasing. #. 'he lessee sho$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. Refer to section 27.7
AACSB: N/A Bloom's: Com(re.ension Difficulty: Basic Learning Ob ecti!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 $ncertainty. %. a/oid 1alance sheet reporting. &. 1ypass restricti/e loan co/enants. Refer to section 27.7
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" 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 Refer to section 27.7
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#&# 'o(ic: 0easons for leasing
)A. 2redDs 8arage is trying to decide whether to lease or 1$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 tarate 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 aftertalease 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 $7.)10
AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$, 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 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$nds is @ percent and the tarate is )0 percent. 'he e+$ipment can 1e leased for $2).;AA a year. hat is the amo$nt of the aftertalease payment! ". $1).;@7 #. $10.25A C. $10.667 D. $15.7A; &. $15.;2A "fterta- lease payment J $2).;AA 31 - A.)04 J $15.7A;
AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$, 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 e+$ipment costs $51.AAA. has a 5-year life. and will 1e worthless after the 5 years. 'he company has a tarate of )0 percent. a cost of 1orrowed f$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 $).06;
AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$, 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 tarate 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 $2.;;A
AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$, 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 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 $12.5AA a year. 'he firm can 1orrow money at ; percent and has a )5 percent tarate. hat is the amo$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 $1.@71.A6
AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$, 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 $ses M"CRC depreciation which allows for )).)) percent. 00.00 percent. 10.;2 percent. and 7.01 percent depreciation o/er years 1 to 0. respecti/ely. 'he e+$ipment can 1e leased for $20.6AA a year. 'he firm can 1orrow money at @.5 percent and has a )0 percent tarate. hat is the amo$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 $1.;60.)6
AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$, 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 Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$, 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 tarate 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 -$51.566
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#$, 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 $ses M"CRC depreciation which allows for )).)) percent. 00.00 percent. 10.;2 percent. and 7.01 percent depreciation o/er years 1 to 0. respecti/ely. "fter that time. the e+$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 tarate. 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 Difficulty: /ntermediate Learning Ob ecti!e: "#$, 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 tarate. 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 Difficulty: /ntermediate Learning Ob ecti!e: "#$, 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 tarate. '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 B. -$0.5;7 C. -$1;.60A %. -$21.651 &. -$)A.277 ="L J $)2@.AAA - 3$1A0.1AA4 3>?:2"@.5M. 04 J -$0.5;7
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#$, 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$c9 is ) years. 'he corporate tarate is )0 percent. 'he company does not e-pect to owe any ta-es for the ne-t se/eral years d$e to acc$m$lated net operating losses. 'he firm $ses straight-line depreciation. hat is the net ad/antage to leasing! A. -$1.71A #. -$;66 C. $)A0 %. $1.AA6 &. $1.)@0 ="L J $0@.AAA - 3$1@.5AA4 3>?:2"7.5M. )4 J -$1.71A
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#$, 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 $1.)0)
0). 8reen ?alley 2arms is considering either leasing or 1$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 $ses straight-line depreciation. has a )2 percent tarate. 1orrows money at 1A percent. and has s$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 $)1.75)
27-06
00. Cool 'reats is considering either leasing or 1$ying a new freeBer $nit. 'he lessor will charge $12.6AA a year for a 2-year lease. 'he p$rchase price is $)2.AAA. 'he freeBer has a 2year life after which time it is e-pected to ha/e a resale /al$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;24 J $@57
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#$, 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. $)7.5)7
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#$, 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 tarate. hat is the net ad/antage to leasing! ". $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 Difficulty: /ntermediate Learning Ob ecti!e: "#$, 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 tarate. 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 Difficulty: /ntermediate Learning Ob ecti!e: "#$, 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 tarate 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 $2;.6;0
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#$, Section: "#&4 'o(ic: Brea+$e!en lease (ayment
0@. " firm 1orrows money at ;.75 percent. $ses straight-line depreciation. and has a )7 percent tarate. 'he firmDs 1rea9-e/en afterta- ann$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 $26.2A;
AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$, Section: "#&4 'o(ic: Brea+$e!en lease (ayment
27-51
5A. 2ireplaces and More is considering the p$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 tarate 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 $7.10;
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#$, Section: "#&4 'o(ic: Brea+$e!en lease (ayment
51. <o$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 $ses straight-line depreciation. 1orrows money at 1A percent. and has a )) percent tarate. hat is the afterta- sal/age /al$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 $5.62;
AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$, 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 $ses straight-line depreciation. 1orrows money at 11.5 percent. and has a )2 percent tarate. hat is the afterta- sal/age /al$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 $1.02;
AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$, 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 $sing M"CRC depreciation which allows for )).)) percent. 00.00 percent. 10.;2 percent. and 7.01 percent depreciation o/er years 1 to 0. respecti/ely. 'he e+$ipment wo$ld 1e worthless after that time. 'he e+$ipment can 1e leased for $1@.1AA a year for 0 years. 'he firm can 1orrow money at @.5 percent and has a 2; percent tarate. hat is the incremental ann$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 -$16.;2)
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#$, 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 $16.6AA a year. 'he firm can 1orrow money at 7.5 percent and has a )6 percent tarate. hat is the incremental ann$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 -$2A.);)
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#$, 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 $ses straight-line depreciation o/er the assetDs life. 1orrows money at ; percent. and has a )0 percent tarate. hat is the incremental cash flow for year 1 if the company decides to lease the e+$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 -$12.1)@
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#$, 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 $ses straight-line depreciation o/er the life of the asset. 1orrows money at 11 percent. and has a )5 percent tarate. 'he company does not e-pect to owe any ta-es for at least 0 years 1eca$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 -$1@.7AA
AACSB: Analytic Bloom's: A((lication Difficulty: Basic Learning Ob ecti!e: "#$, 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 $12.)AA a year for 0 years. 'he firm can 1orrow money at 7.5 percent and has a )5 percent tarate. hat is the incremental ann$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 -$1A.;1)
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#$, 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 $)5.@AA a year. 'he firm can 1orrow money at 7.5 percent and has a )2 percent tarate. 'he company does not e-pect to owe any ta-es for at least the ne-t 0 years d$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 -$5A.@AA
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate Learning Ob ecti!e: "#$, 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 Learning Ob ecti!e: "#$% Section: "#&% 'o(ic: )inancial lease
27-56
6A.
hat are some GgoodG reasons for opting to lease rather than p$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$red 1orrowing. 2eed1ac9( Refer to section 27.7
AACSB: 0eflecti!e t.in+ing Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#&# 'o(ic: 0easons for leasing
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. 2eed1ac9( Refer to section 27.6
AACSB: 0eflecti!e t.in+ing Bloom's: Com(re.ension Difficulty: Basic Learning Ob ecti!e: "#$, Section: "#&4 'o(ic: Net ad!antage to leasing
27-57
62.
hy might a firm opt to sell and lease1ac9 an asset which it c$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. 2eed1ac9( Refer to section 27.1
AACSB: 0eflecti!e t.in+ing Bloom's: Com(re.ension Difficulty: Basic Learning Ob ecti!e: "#$" Section: "#&% 'o(ic: Sale and leasebac+
6). <o$ 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 tarate 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 $516.AA7
AACSB: Analytic Bloom's: Analysis Difficulty: Basic 5OC 6: "#$% Learning Ob ecti!e: "#$, Section: "#&'o(ic: Net ad!antage to leasing
27-5;
60. <o$ 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 $2 million and it wo$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 $5AA.AAA per year for 0 years. "ss$me the tarate 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 $2@A.@;;
AACSB: Analytic Bloom's: Analysis Difficulty: Basic 5OC 6: "#$" Learning Ob ecti!e: "#$, Section: "#&'o(ic: Net ad!antage to leasing
27-5@
65. <o$ 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 $2 million and it wo$ld 1e depreciated straight-line to Bero o/er 0 years. #eca$se of radiation contamination. it will act$ally 1e completely /al$eless in 0 years. "ss$me the tarate 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 $576.077
AACSB: Analytic Bloom's: Analysis Difficulty: Basic 5OC 6: "#$, Learning Ob ecti!e: "#$, Section: "#&'o(ic: Brea+$e!en lease (ayment
27-6A
66. <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 $2 million and it wo$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 $6AA.AAA per year for 0 years. "ss$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: "#$1 Learning Ob ecti!e: "#$, Section: "#&'o(ic: Net ad!antage to leasing
27-61
67. <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 $) million and it wo$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 $75A.AAA per year for 0 years. "ss$me the tarate 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 $@A5.762
AACSB: Analytic Bloom's: Analysis Difficulty: Basic 5OC 6: "#$Learning Ob ecti!e: "#$, Section: "#&'o(ic: Lease (ayment
27-62
6;. 'he ildcat Hil Company is trying to decide whether to lease or 1$y a new comp$terassisted drilling system for its oil e-ploration 1$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 $; million and will 1e depreciated straight-line to Bero o/er 5 years. ildcatDs tarate is )1 percent. and the firm can 1orrow at ; percent. Lam1ert Leasing Company has offered to lease the drilling e+$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 $1.;@).2)1
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate 5OC 6: "#$# Learning Ob ecti!e: "#$, Section: "#&'o(ic: Lease or buy
27-6)
6@. 'he ildcat Hil Company is trying to decide whether to lease or 1$y a new comp$terassisted drilling system for its oil e-ploration 1$siness. Management has decided that it m$st $se the system to stay competiti/eI it will pro/ide $55A.AAA in ann$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 $5AA.AAA at then end of the lease. ildcatDs tarate is )1 percent. and the firm can 1orrow at 1A percent. Lam1ert Leasing Company has offered to lease the drilling e+$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 &. $762.@)7 'he preta- cost sa/ings are not rele/ant to the lease /ers$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.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@0I R J $5A).652.75 >reta- lease payment J $5A).652.75K31 - A.)14 J $72@.@)2
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate 5OC 6: "#$7 Learning Ob ecti!e: "#$, 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$y a new comp$terassisted 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 $1.2 million in ann$al preta- cost sa/ings. 'he system costs $6.7 million and will 1e depreciated straight-line to Bero o/er 0 years. ildcatDs tarate is )5 percent. and the firm can 1orrow at 11 percent. Lam1ert Leasing Company has offered to lease the drilling e+$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; &. $560.71@ 'he preta- cost sa/ings are not rele/ant to the lease /ers$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$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.A7150 ="L J $501.2;7
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate 5OC 6: "#$8 Learning Ob ecti!e: "#$, 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 tarate 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 $162.7@5.)0
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate 5OC 6: "#$%9 Learning Ob ecti!e: "#$, Section: "#&'o(ic: Setting t.e lease (rice
27-66
72. "$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 $1;.7AA after three years. 'he lease factor. which is the interest rate on the loan. is the ">R of the loan di/ided 1y 2.0AA. 3 eDre not really s$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 tarate. 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 $001.6)
AACSB: Analytic Bloom's: Analysis Difficulty: /ntermediate 5OC 6: "#$%% Learning Ob ecti!e: "#$, Section: "#&'o(ic: Automobile lease (ayment
27-67

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Chapter 27 - Leasing

Multiple Choice Questions

Chapter 27 Leasing "nswer *ey

Multiple Choice Questions

="L $)2.AAA - 3$12.6AAK1.A;4 - 3$22.6AAK1.A;24 J $@57

Multiple Choice Questions

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