Question 1

Most loans require the borrower to place a reasonable down payment. Leases generally do require an initial down payment, beyond the first and last monthly payment.

Accepted Answer

Leases often require an initial payment at the signing, but this is not always as substantial as a down payment for a loan. The initial lease payment can include the first month's payment, a security deposit, acquisition fee, and possibly a down payment, but the total upfront cost can be less than a typical loan down payment.

Question 2

The internal rate of return rule is to accept the investment project if the opportunity cost of capital is less than the internal rate of return. If the cost of capital is equal to the IRR, the project has zero NPV. On the other hand if the cost of capital is greater than the IRR, the project has a negative NPV. The IRR will give the same answer as the NPV. The IRR is defined as the discount rate that will make the NPV of the project equal zero.

Accepted Answer

The statement accurately describes the internal rate of return rule and its relationship to the net present value of an investment project.

Question 3

If the lessor assumes the costs of maintenance, insurance, and taxes, it will usually pass the expense to the lessee in the form of increased lease payments.

Accepted Answer

When the lessor assumes the costs of maintenance, insurance, and taxes, it will often include those expenses in the calculation of the lease payments, resulting in an increased amount for the lessee to pay.

Question 4

There is also a positive balance sheet effect of leasing simply because the lease is considered an asset.

Accepted Answer

Leasing typically involves payments for the use of an asset and does not result in ownership or an asset being added to the lessee's balance sheet; instead, the lease may be recognized as a liability and right-of-use asset under certain accounting standards, but it does not inherently increase the company's asset base in the way purchasing an asset would.

Question 5

The gross present value recognizes that a dollar to day is worth more than a dollar tomorrow, simply because the dollar today can be invested to start earning interest immediately.

Accepted Answer

The answer of The gross present value recognizes that a...

Question 6

or the purpose of the purchasing professional, two methods will be considered: (1) traditional loans and (2) leases. The leasing method has been become very popular in the last 20 years and can be used to finance nearly any kind of fixed asset. The lease-versus-purchase decision usually requires many considerations.

Accepted Answer

The statement is true as it mentions that two methods are usually considered, which are traditional loans and leases. It also highlights the popularity and versatility of the leasing method, and the fact that the lease-versus-purchase decision requires careful analysis.

Question 7

In the case of fast-moving technology, it is possible for the lessee to shift the risk level to the lessor. Computer technology is a good example of the risk of ______________.

Accepted Answer

The fast-moving technology, such as computer technology, carries the risk of becoming obsolete quickly. Therefore, the lessee can shift this risk to the lessor in a lease agreement.

Question 8

leasing arrangement can actually ________ a firm's borrowing capacity.

Accepted Answer

Leasing allows a firm to acquire assets without actually having to buy them, which means the firm can conserve its cash and preserve its borrowing capacity. Since leasing is not considered a form of debt, it does not appear on the firm's balance sheet as liabilities, which means the firm's debt-to-equity ratio will improve. This will increase the firm's borrowing capacity, allowing it to raise more debt to finance its operations.

Question 9

The total operating costs also will have a significant effect on the capital acquisition. Which of the following are the principal operating variables that must be investigated?

Accepted Answer

All three variables (productivity, durability, and dependability) must be investigated to determine the operating costs. Productivity refers to how efficiently the capital asset can produce its intended output, durability refers to the expected lifespan of the asset, and dependability refers to the likelihood of breakdowns or maintenance needs. All three factors will contribute to the overall operating costs of the asset. Therefore, choice D, "All the above," is the best answer.

Question 10

Payback is the best known investment criterion. Payback is the number of ________ it takes to repay the initial investment.

Accepted Answer

Payback is the number of years it takes to repay the initial investment.

Question 11

ffects on future financing. Leasing versus purchasing can also obligate cash needed for other purposes or alternative projects.

Accepted Answer

The answer of ffects on future financing. Leasing versus purchasing...

Question 12

t (the financial plan analysis) stage, a comprehensive comparison of the selected alternatives is performed. The planned project selections are then measured against the initial company _____________.

Accepted Answer

The financial plan analysis stage is focused on selecting the best project alternatives and measuring them against the company's goals and objectives. Therefore, option B, goals and objectives, is the most appropriate answer. Options A, C, D, and E are too broad or too specific to capture the essence of this stage.

Question 13

Tax effect. Lease payments are expenses that can be written off against income immediately. Loans are depreciated over a longer period of time. One major advantage of leases over loans is the impact leases have on land use. When a firm leases land for its operations, it can not deduct the lease expense from income. Purchased land, on the other hand, can be deducted from tax obligations.

Accepted Answer

The first sentence is true, but the second sentence is incorrect. Lease payments can also be deducted from tax obligations, but they are treated differently than loan payments. Additionally, the last sentence is incorrect because purchased land cannot be deducted from tax obligations. Land is considered a capital asset and can only be depreciated over a longer period of time.

Question 14

The difference between the ARR and NPV methods is the timing of the various ____________ cash flows. In other words, if the __________ increases, the project becomes increasingly more attractive.

Accepted Answer

The blank should be filled with "expected" as the ARR (average accounting rate of return) method focuses on the expected cash inflows and outflows over the life of the project, while the NPV (net present value) method discounts the cash flows back to their present value at the required rate of return. Therefore, the timing of the cash flows is different between the two methods. As for the second blank, it should be filled with "ARR" as an increase in the expected accounting rate of return makes the project more attractive according to the ARR method.

Question 15

The after-tax borrowing rate is commonly known as the ___________ rate.

Accepted Answer

The after-tax borrowing rate is commonly referred to as the discount rate. This rate is used in finance to calculate the present value of future cash flows after accounting for taxes.

Question 16

With cash-flow data in hand, the company can begin the formal process of evaluating capital equipment or projects. The five most commonly used methods for an economic evaluation of individual projects are payback, average rate of return, gross present value, internal rate of return, and profitability index.

Accepted Answer

The correct term is "net present value" (NPV), not "gross present value."

Question 17

If expected ________ value is high for leased equipment, the cost of ownership to the lessee may be lower. In this case, the lessee should write a contract that will enable it to buy the fixed asset at the end of the lease term.

Accepted Answer

The salvage value is the estimated residual value of an asset at the end of its useful life. If the salvage value is high, it means the asset retains significant value, making it beneficial for the lessee to purchase it at the end of the lease.

Question 18

The ___________________ is defined as the present value of future flows divided by the initial investment.

Accepted Answer

The profitability index (PI) is defined as the ratio of the present value of future cash flows to the initial investment. It helps in evaluating investment opportunities by comparing the present value of cash inflows to the initial investment required to generate those cash inflows. It is a useful tool for ranking investment projects and choosing the best investment among competing projects.

Question 19

The final selection is usually based on the accept-reject decision. The __________ may be based on the cost of capital, the opportunity cost, and other conceptual standards.

Accepted Answer

The accept-reject decision is usually based on the hurdle rate, which is the minimum rate of return required by an investor or a company on an investment project to make it worthwhile. The hurdle rate is often based on the cost of capital, the opportunity cost, and other conceptual standards, and it represents the minimum acceptable rate of return that an investment project should generate to be considered viable. Therefore, the hurdle rate is a critical component of investment analysis and is used to determine the profitability and feasibility of investment projects.

Question 20

The average rate of return is the average cash flow after tax ________ the initial investment: The ARR is the most popular evaluation criterion used today.

Accepted Answer

The average rate of return is calculated by dividing the average cash flow after tax by the initial investment. This calculation yields a percentage that represents the average return on investment over the project's lifespan.

Quiz 16: Equipment Acquisition and Disposal