Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

There are two parties in any lease contract-the lessee and the lessor. To a lessor, a lease analysis involves a capital budgeting analysis of the

image text in transcribed

There are two parties in any lease contract-the lessee and the lessor. To a lessor, a lease analysis involves a capital budgeting analysis of the property or equipment to be leased. The lessor's decision is either to purchase and lease-out the asset, or not make the investment at all. Like any capital budgeting decision, the lessor needs to evaluate the rate of return expected to be earned from making the lease. Further, since the cost and other terms of leases involving high-cost items are negotiated, this rate of return information is also important information for a prospective lessee. From the following statements, identify the steps involved in lease analysis from a lessor's perspective. Check all that apply. Determine the periodic cash outflow that the lessor owes to the lessee Check and ensure that the lessor's cost of capital is more than the rate of return on the lease Determine periodic cash inflows from the lessee Determine the invoice price of the leased equipment minus any lease payments made in advance Pele Corp. is a professional leasing company. The leasing manager has to evaluate some lease agreements under the following conditions: The company's marginal federal-plus-state income tax rate is 35%. The company has alternative investment options of similar risk that yield 8.50%. Assuming all other factors and values are constant among these leases, from the lessor's perspective, which of the following is the best lease? A lease that has an NPV of -$120,000 A lease that generates an after-tax rate of return of 4.43% A lease that has an IRR of 4.73% A lease that has an MIRR of 6.13% You probably noticed that lease analysis seems a bit like capital budgeting analysis, because the cash flows are estimated over the life of the project or lease. The present value of the cash flows dictates the manager's decision. Are cash flows that are estimated in lease analysis more or less risky than capital budgeting cash flows? More risky Less risky

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Statements A Step By Step Guide To Understanding And Creating Financial Reports

Authors: Thomas Ittelson

1st Edition

1632652072, 978-1632652072

More Books

Students also viewed these Finance questions

Question

Describe the seven standard parts of a letter.

Answered: 1 week ago

Question

Explain how to develop effective Internet-based messages.

Answered: 1 week ago

Question

Identify the advantages and disadvantages of written messages.

Answered: 1 week ago