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Explain the advantages to leasing revenue producing assets.

What are the disadvantages?

What is the difference between an operating lease and a financing (capital) lease?

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Irving Heathcote
Irving HeathcoteLv2
28 Sep 2019

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Riverton Mining plans to purchase or lease $435,000 worth of excavation equipment. If purchased, the equipment will be depreciated on a straight-line basis over five years, after which it will be worthless. If leased, the annual lease payments will be $101,169 per year for five years. Assume Riverton's borrowing cost is 7.5%, its tax rate is 30%, and the lease qualifies as a true tax lease.

a.) If Riverton purchases the equipment, what is the amount of the lease-equivalent loan?

The amount of the lease-equivalent loan is...... $. (Round to the nearest dollar.)

b.) Is Riverton better off leasing the equipment or financing the purchase using the lease-equivalent loan?

Riverton is better off ...... (Fill in either "financing the purchase" or "leasing the equipment")

c.) What is the effective after-tax lease borrowing rate? How does this compare to Riverton's actual after-tax borrowing rate?

The effective after-tax lease borrowing rate is......... %. (Round to two decimal places.)

Please severals people solved this question but wrong answer. l need a very good finance person to solve it

Quiz 6

Leasing

Assume that Theta Corporation is looking to enter into an Operating Lease for new machinery.

The Lease payment each year would be $125,000. Theta’s tax rate is 30%, and it’s pre-tax cost of debt is 12% The term of the lease is for 4 years, with the first payment made at the beginning of the year.

a. What discount rate will Theta Corporation use to discount the cash flows from this Lease? (1 point.)

b. Calculate the tax savings from the lease payment. (2 points)

c. Complete the table to determine the Operating Lease Net Cash Flows. (3 points)

Year

0

1

2

3

Lease Pmt.

Tax Savings

Net Cash Flow

(Over)

d. Calculate the NPV of Leasing. (2 points)

e. If the NPV of Owning the machinery is ( $400,000) what is the NAL? (2 points)

Your firm is considering leasing a

$51,000

copier. The copier has an estimated economic life of eight years. Suppose the appropriate discount rate is

8.9%

APR with monthly compounding.

Classify each lease below as a capital lease or operating? lease, and explain? why:

a. A? four-year fair market value lease with payments of

$1,140

per month.

b. A? six-year fair market value lease with payments of

$790

per month.

c. A? five-year fair market value lease with payments of

$925

per month.

d. A? five-year fair market value lease with payments of

$995

per month and an option to cancel after three years with a??

$8,500

cancellation penalty.

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