1. In terms of time value of money, when evaluating lease payments and tax savin

ID: 2791312 • Letter: 1

Question

1. In terms of time value of money, when evaluating lease payments and tax savings, one should bear in mind that often:

A. lease payments occur at the end of the year.

B. tax savings on lease payments occur at the beginning of the year.

C. lease payments occur in the beginning of the year.

D. there is no tax savings on lease payments.

2. The appropriate discount rate to evaluate the lease-verses-purchase decision should be:

A. the firm's overall cost of capital.

B. the after-tax cost of debt with the exception of using cost of capital to evaluate salvage value.

C. the cost of debt.

D. the cost of retained earnings.

3. Cash flows in borrowing to purchase include all except:

A. lease payments.

B. maintenance costs.

C. purchase of the equipment.

D. salvage value.

Answer:

3.A. lease payments.

Lease payment is another form of acquiring an asset

2.B. the after-tax cost of debt with the exception of using cost of capital to evaluate salvage value.

Lease payments have tax benefits so after tax cost should be used

1.C. lease payments occur in the beginning of the year.

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