Your company needs to acquire a new heavy-duty truck, as shown in the picture below, to haul equipment and supplies to the new LNG terminal being built at Kitimat, BC. The tractor and trailer costs $240,000. Your options are to borrow at an interest rate of 8% (pre-tax) or lease the unit. Neither option will affect revenue. If you lease, the lease payments are $40,000 per year, payable at the beginning of each year, for eight years. If you buy the truck and trailer, you will use a CCA rate of 30%, using the Accelerated Investment Incentive. Initially, assume that both firms have a tax rate of 40%.

Which of the following characteristics are true of Operating Leases?

a. Are often able to be canceled

b. Lessor is usually responsible for insurance, taxes & maintenance

c. Usually short-term

d. All of the above are true

a. & b. above are true

Which of the following characteristics are true of Capital (Financial) Leases?

a. Shown as both an asset & a liability on the Balance Sheet

b. Lease term is for less than 75% of the economic life of the asset

c. PV of the lease is equal to at least 90% of the assets fair market value

d. All of the above are true

e. a. & c. above are true