AGEC 330 - Quiz 19

A farmer is considering the option to lease a new module builder. Inflation is assumed to be zero. Assume that the lease payment is constant through the lease agreement. Assume that the lease payments would be made at the beginning of the year and the lease ends at the end of the 12th year. This lessor will pay for repairs and maintenance. The operating expenses for this tractor will be $3,500 with a marginal tax rate of 20% and an after tax discount rate of 7%. (i) Calculate the net present value of the lease investment. a. -$20,996 b. -$23,796 c. -$2,800 d. None of the answers are correct (ii) Calculate the annuity equivalent of this lease arrangement. a. -$3,793 b. -$2,800 c. -$2,995 d. None of the answers are correct

1/2 correct: b d ___________ 1/2 correct: b a

How might a lessee demonstrate lease worthiness? Show repayment capacity Pledge collateral Meet net worth requirements All of the above

All of the above

Which of the following is not a condition that would cause a capital lease to be included on the balance sheet? At the start of the lease, the present value of the rental payments is below 75% of the estimated fair market value of the leased assets. The lease transfers ownership of the asset to the lessee by the end of the lease contract. The lease contains an option for the lessee to purchase the asset at a bargain price (far below market value) The term of the lease equals or exceeds 75% of the asset's estimated economic life.

At the start of the lease, the present value of the rental payments is below 75% of the estimated fair market value of the leased assets.

The equivalent in leasing to a down-payment on a credit purchase is _____________.

Both a. and b.

Mutually acceptable lease terms may be found by carefully analyzing __________, ____________, and _________________ from the perspective of both lessor and lessee.

Cash flow, leverage, and tax positions

Contract feeding of livestock is a form of _____________________. Leveraged leasing Custom hiring Operating leasing Capital leasing

Custom hiring

Capital leases are also sometimes referred to as ___________________. Long-term Leases Owner's Leases Buyer's Leases Finance Leases

Finance Leases

What is the main feature of leveraged leasing? Formal involvement of a lender in providing debt capital Informal involvement of a 3rd party in provided maintenance Formal involvement of a lessor in providing debt capital None of the above

Formal involvement of a lender in providing debt capital

In a leveraged lease agreement the lessee negotiates leasing terms with the ___________. Lessor Lender Lawyer None of the above

Lessor

Rental charges under the terms of a capital lease include. Lessor's profit Lessor's cost of ownership Lessor's cost of debt Both a. and b.

Lessor's profit

Rental charges under the terms of a capital lease include. Lessor's profit Lessor's cost of ownership Lessor's cost of debt Both a. and b.

Lessor's profit

a capital lease is comparable to a

NOT non of the above

Custom hiring often combines the use of a given asset with ___________________. Maintenance Farming Inputs Labor Services Both a. and c.

both a. and c. BOTH Maintenance and Labor Services

A rancher is considering the option to lease new equipment. Inflation is assumed to be zero. Assume that the lease payment is constant through the lease agreement. Assume that the lease payments would be made at the beginning of the year and the lease ends at the end of the 8th year. This lessor will pay for repairs and maintenance. The operating expenses for this tractor will be $5,525 with a marginal tax rate of 15% and an after tax discount rate of 9%. (i) Calculate the net present value of the lease arrangement investment. a. -$32,592 b. -$4,696.25 c. -$28,332.25 d. None of the answers are correct (ii) Calculate the annuity equivalent of this lease arrangement. a. -$5,119 b. -$5,267 c. -$4,270 d. None of the answers are correct

c a

Custom harvesting of crops, custom applications of chemicals and fertilizer, and custom or contract feeding of livestock in commercial feedlots are common examples of ___________. operating lease custom hiring capital lease leveraged lease None of the answers are correct

custom hiring

__________ is a form of leasing that combines the hiring of labor services with the use of the tangible asset. operating lease custom hiring capital lease leveraged lease None of the answers are correct

custom hiring

The leveraged leasing is the formal involvement of a lender in providing __________ to finance the lessor's purchase of the leased asset.

debt capital

Capital leases are always included on the balance sheet.

f

A leased asset should be capitalized on the balance sheet if the lease contains an option for the lessee to sell the asset at a bargain price.

false

A leveraged Lease is a form of leasing that combines the hiring of labor services with the use of the tangible asset.

false

Capital Lease (sometimes called Finance Lease) is a long-term contractual arrangement in which the lessee does not acquire control of an asset.

false

Capital Leases are a short-term lease in which the rental charge is calculated on a time basis. The lessor owns the asset and performs nearly all of the functions of ownership, including maintenance. The lessee pays the direct costs, such as fuel and labor.

false

Capital leases may be cancelled.

false

It is important to remember in a lease the buyer will take the ownership of the asset and the seller will lose ownership completely.

false

Leasing of non-real estate assets in agriculture is more prevalent than in other industries.

false

Lessee is the owner of an asset who permits another party to use the asset under a lease

false

The operating lease is usually a long- term rental arrangement in which the rental charge is calculated on a time basis.

false

A/An _________ is a contract by which control over the right to use an asset is transferred from one party (the lessor) to another party (the lessee) for a specified time in return for a rental payment to cover the lessor's costs of ownership. future foward lease option None of the answers are correct

lease

______________ is a method of financing the control of an asset that separates its use from its ownership. mortgage charter leasing none of the above

leasing

The party to which control over the right to use an asset is transferred via a lease agreement is known as the __________.

leesee

The capital lease is a long-term contractual arrangement in which the _______ acquires control of an asset in return for rental payments to the _______. lessee, lessor lessor, lessee farmer, banker none of the above

lessee, lessor

In large agribusinesses, more complex formal lease arrangements called __________ leasing, may develop directly involving the lenders with the lessor and the lessee. contact leasing leveraged leasing innovative leasing none of the above

leveraged leasing

A leased asset should be capitalized on the balance sheet if the lease contains an option for the lessee to ____________ the asset at a bargain price. sell purchase lease none of the above

purchase

A lease is a contract by which control over the right to use an asset is transferred from one party to another party for a specified time in return for a rental payment to cover the lessor's cost of ownership.

true

Companies offering operating leases are usually those that perform maintenance tasks, such as manufacturers or their subsidiaries, dealers, or other specialized businesses.

true

Custom hiring resembles other types of leasing in that it avoids the financial drain of capital investments and the obsolescence risk of owned capital.

true

Farmers and other producers benefit indirectly from the use of leveraged leasing by cooperatives to finance their operations.

true

In purchase, the buyer will take the ownership of the asset and the seller will lose the ownership.

true

Leasing is a method of financing the control of an asset that separates its use from its ownership.

true

The four different types of leasing arrangements discussed in this lecture are operating leases, custom hiring, capital lease, and leveraged leasing.

true

The main feature of leveraged leasing is the formal involvement of a lender in providing debt capital to finance the lessor's purchase of the leased asset.

true

The operating lease is usually a short- term rental arrangement in which the rental charge is calculated on a time basis true

true

The operating lease is usually a short- term rental arrangement in which the rental charge is calculated on a time basis.

true

A farmer is considering the purchase or lease of a forklift. He can buy a new forklift or lease a new forklift. He believes that each forklift will provide the same service but the costs are different. He has provided the following information. Inflation is assumed to be zero. Assume that the lease payment is constant throughout the lease agreement. Assume that the lease payment would be made at the beginning of the year and the lease ends at the end of the 10th year. The lessor will pay repairs and maintenance. Also assume that this farmer could claim the tax deduction due to the lease payment when it is paid. The new forklift has a price of $11,400, a before-tax net return of -$6,100, an investment life of 10 years, and a terminal value of $8,000. If he was to lease the forklift the operating expenses for this tractor will be $3,500. Suppose that the pre-tax rate of return is 6%, the marginal tax rate is 24%, and the IRS allows him to depreciate the tractor over 14 years using the straight-line method. (i) What is the NPV of the purchased forklift? a. -$42,040 b. -$121,880 c. -$57,254 d. None of the answers are correct (ii) What is the annuity equivalent of the purchased forklift? a. -$5,328.70 b. -$5,236.33 c. -$4,709.84 d. None of the answers are correct (iii) What is the NPV if the forklift was leased? a. -$11,314 b. -$9,418 c -$21,943 d. None of the answers are correct (iv) What is the annuity equivalent if the forklift was leased? a.-$3,393 b. -$2,781 c. -$3,481 d. None of the answers are correct (v) Which truck should this farmer choose? a. Purchase b. Lease

a a c b b

A farmer is considering the option to lease a new tractor. Inflation is assumed to be zero. Assume that the lease payment is constant through the lease agreement. Assume that the lease payments would be made at the beginning of the year and the lease ends at the end of the 10th year. The lessor will pay for repairs and maintenance. The operating expenses for this tractor will be $7,500 with a marginal tax rate of 20% and an after tax discount rate of 8.5%. (i) Calculate the net present value of the lease investment. a. -$42,714 b. -$6,000 c. -$39,649 d. None of the answers are correct (ii) Calculate the annuity equivalent of this lease arrangement. a. -$7,555 b. -$6,510 c. -$3,973 d. None of the answers are correct

a b

A farmer is considering the purchase or lease of a truck. He can buy a new truck or lease a new truck. He believes that each truck will provide the same service but the costs are different. He has provided the following information. Inflation is assumed to be zero. Assume that the lease payment is constant throughout the lease agreement. Assume that the lease payment would be made at the beginning of the year and the lease ends at the end of the 6th year. The lessor will pay repairs and maintenance. Also assume that this farmer could claim the tax deduction due to the lease payment when it is paid. The new truck has a price of $35,300, a before-tax net return of -$8,300, an investment life of 6 years, and a terminal value of $17,100. If he was to lease the tractor the operating expenses for this tractor will be $3,500. Suppose that the pre-tax rate of return is 11%, the marginal tax rate is 22%, and the IRS allows him to depreciate the tractor over 10 years using the straight-line method. A farmer is considering the purchase or lease of a truck. He can buy a new truck or lease a new truck. He believes that each truck will provide the same service but the costs are different. He has provided the following information. Inflation is assumed to be zero. Assume that the lease payment is constant throughout the lease agreement. Assume that the lease payment would be made at the beginning of the year and the lease ends at the end of the 6th year. The lessor will pay repairs and maintenance. Also assume that this farmer could claim the tax deduction due to the lease payment when it is paid. The new truck has a price of $35,300, a before-tax net return of -$8,300, an investment life of 6 years, and a terminal value of $17,100. If he was to lease the tractor the operating expenses for this tractor will be $3,500. Suppose that the pre-tax rate of return is 11%, the marginal tax rate is 22%, and the IRS allows him to depreciate the tractor over 10 years using the straight-line method. (i) What is the NPV of the purchased truck? a. -$51,146 b. -$32,267 c. -$24,979 d. None of the answers are correct (ii) What is the annuity equivalent of the purchased truck? a. -$8,505.72 b. -$11,259.12 c. -$13,085.12 d. None of the answers are correct (iii) What is the NPV if the truck was leased? a. -$8,945 b. -$8,022.13 c. -13,465 d. None of the answers are correct (iv) What is the annuity equivalent if the truck was leased? a. -$8,197 b. -$2,964 c. -$5,373 d. None of the answers are correct (v) Which truck should this farmer choose? a. Purchase b. Lease

a b c b b

A farmer is considering the purchase or lease of a tractor. He can buy a new tractor or lease a new tractor. He believes that each tractor will provide the same service but the costs are different. He has provided the following information. Inflation is assumed to be zero. Assume that the lease payment is constant throughout the lease agreement. Assume that the lease payment would be made at the beginning of the year and the lease ends at the end of the 13th year. The lessor will pay repairs and maintenance. Also assume that this farmer could claim the tax deduction due to the lease payment when it is paid. The new tractor has a price of $41,500, a before-tax net return of -$6,200, an investment life of 13 years, and a terminal value of $10,900. If he was to lease the tractor the operating expenses for this tractor will be $3,500. Suppose that the pre-tax rate of return is 11%, the marginal tax rate is 22%, and the IRS allows him to depreciate the tractor over 8 years using the straight-line method. (i) What is the NPV of the purchased tractor? a. -$68,835 b. -$70,628 c. -$73,824 d. None of the answers are correct (ii) What is the annuity equivalent of the purchased tractor? a. -$10,352.90 b. -$4,942.65 c. -$8,988.90 d. None of the answers are correct (iii) What is the NPV if the tractor was leased? a. -$25,693 b. -$27,749 c. -$22,699 d. None of the answers are correct (iv) What is the annuity equivalent if the tractor was leased? a. -$4,574 b. -$2,964 c. -$3,586 d. None of the answers are correct (v) Which tractor should this farmer choose? a. Purchase b. Lease

a c c b b