Lease vs. Buy Decisions: A Comprehensive Guide for Industrial Engineers

Question 1

Which type of lease offers the lessee the most flexibility?

Accepted Answer

Operating lease

Answer

Finance lease

Answer

Sale-leaseback

Answer

Sublease

Question 2

What is a primary advantage of buying an asset compared to leasing it?

Accepted Answer

Ownership of the asset

Answer

Lower overall cost

Answer

Increased flexibility

Answer

Improved cash flow

Question 3

In a lease-versus-buy analysis, what does the break-even point represent?

Accepted Answer

The point where the present value of lease payments equals the present value of ownership costs

Answer

The point where the monthly lease payment equals the monthly loan payment

Answer

The point where the total cost of ownership equals the salvage value of the asset

Answer

The point where the tax savings from leasing exceed the tax savings from ownership

Question 4

What is the primary purpose of a lease contract?

Accepted Answer

To provide temporary use of an asset

Answer

To transfer ownership of an asset

Answer

To secure financing for an asset purchase

Answer

To minimize tax liability

Question 5

Which industry typically utilizes leasing extensively as a financing option?

Accepted Answer

Transportation

Answer

Manufacturing

Answer

Retail

Answer

Healthcare

Question 6

Evaluate the potential risks associated with entering into a long-term lease agreement. Discuss specific measures that can be taken to effectively mitigate these risks.

Accepted Answer

Technological advancements may render leased assets obsolete.

Accepted Answer

Fluctuations in interest rates can impact lease payments and overall costs.

Accepted Answer

The lessee's financial instability or default can lead to financial losses for the lessor.

Accepted Answer

Leases may include hidden costs or unexpected expenses that can increase the total cost of the lease.

Question 7

In a lease or buy decision, which factor is typically NOT considered?

Accepted Answer

Expected profit margin

Answer

Cost analysis

Answer

Intangible benefits

Answer

Flexibility

Question 8

A lease contract that grants the lessee the option to purchase the asset at the end of the lease term is known as a:

Accepted Answer

Finance lease

Answer

Sale-leaseback

Answer

Operating lease

Answer

Capital lease

Question 9

Which of the following is a key benefit of leasing?

Accepted Answer

Improved cash flow

Answer

Higher depreciation deductions

Answer

Reduced risk of obsolescence

Answer

Increased tax liability

Question 10

The total present value of all lease payments, including the residual value, is referred to as the:

Accepted Answer

Lease present value

Answer

Lease rental cost

Answer

Net present value

Answer

Equivalent annual cost

Question 11

Which of the following tax benefits favors leasing over buying?

Accepted Answer

Lease payments are fully deductible

Answer

Sales tax is not applicable to lease payments

Answer

Leased assets are exempt from property tax

Answer

Capital gains tax is accelerated

Question 12

For a business that frequently upgrades its equipment, which option is typically most appropriate?

Accepted Answer

Leasing the equipment with a short-term contract

Answer

Purchasing the equipment outright

Answer

Financing the equipment with a long-term loan

Answer

Renting the equipment on a weekly basis

Question 13

In a sale-leaseback transaction:

Accepted Answer

A business sells an asset to a lessor and then leases it back

Answer

A lessor sells an asset to a lessee and then leases it back

Answer

A business leases an asset to a lessor and then repurchases it

Answer

A lessor leases an asset to a lessee and then sells it back

Question 14

Which of the following is a potential drawback of leasing compared to buying?

Accepted Answer

Limited equity build-up

Answer

Reduced maintenance expenses

Answer

Greater flexibility in asset usage

Answer

Easier access to financing

Question 15

Which international organization establishes the accounting standards for leases?

Accepted Answer

International Accounting Standards Board (IASB)

Answer

Financial Accounting Standards Board (FASB)

Answer

American Institute of Certified Public Accountants (AICPA)

Answer

Securities and Exchange Commission (SEC)

Question 16

In a lease agreement, the party that retains ownership of the asset is the:

Accepted Answer

Lessor

Answer

Lessee

Answer

Guarantor

Answer

Sublessor

Question 17

In accounting, under which type of lease is the leased asset recorded on the lessee's balance sheet as an asset?

Accepted Answer

Capital lease

Answer

Operating lease

Answer

Sale-leaseback

Answer

Sublease

Question 18

In a capital lease, who bears the risks and rewards of ownership?

Accepted Answer

Lessee

Answer

Lessor

Answer

Guarantor

Answer

Sublessor

Question 19

Which of the following is NOT a factor to consider when making a lease or buy decision?

Accepted Answer

Historical cost of the asset

Answer

Budgetary constraints

Answer

Long-term business strategy

Answer

Availability of tax credits

Question 20

Which method is commonly used to calculate the present value of lease payments and determine the cost of leasing?

Accepted Answer

Equivalent annual cost (EAC)

Answer

Net present value (NPV)

Answer

Internal rate of return (IRR)

Answer

Profitability index (PI)

Question 21

In which scenario is leasing an asset typically more advantageous?

Accepted Answer

In both scenarios A and B

Answer

When flexibility and short-term use are priorities

Answer

When acquiring ownership is not a primary objective

Answer

When significant tax savings are available

Question 22

How does salvage value impact lease versus buy decisions?

Accepted Answer

Salvage value decreases the cost of ownership

Answer

Salvage value enhances the tax savings associated with leasing

Answer

Salvage value makes leasing a more attractive option overall

Answer

Salvage value has no impact on lease versus buy decisions

Question 23

How does inflation impact lease or buy decisions, and what strategies can be used to minimize its effects?

Accepted Answer

Strategies to mitigate inflation's impact include negotiating adjustable lease payments and using inflation-linked contracts.

Answer

Inflation always makes leasing more advantageous than buying.

Answer

Inflation only affects lease decisions with long terms.

Answer

There are no strategies to mitigate inflation's impact on lease or buy decisions.

Question 24

When comparing lease versus buy options, which environmental factor should be considered?

Accepted Answer

Disposal costs at the end of the product's life

Answer

Maintenance expenses

Answer

Initial investment costs

Question 25

To conduct a proper comparison of leasing and buying options, it is necessary to:

Accepted Answer

Calculate the present value of all cash flows associated with each alternative

Answer

Consider only the upfront acquisition costs

Answer

Estimate the resale value of the asset at the end of the lease term

Answer

Ignore tax implications

Question 26

In a leveraged lease, the lessor typically:

Accepted Answer

Provides a portion of the financing

Answer

Bears the majority of the ownership risks

Answer

Has no recourse to the lessee in case of default

Answer

Owns the asset at the end of the lease term

Question 27

Which of the following factors does NOT influence the cost of leasing?

Accepted Answer

Manufacturer's warranty coverage

Answer

Interest rates

Answer

Asset value

Answer

Lease term length

Question 28

When analyzing lease or buy decisions, which factor is irrelevant to the assessment?

Accepted Answer

Personal opinions

Answer

Cost of capital

Answer

Operational flexibility

Answer

Maintenance costs

Question 29

Which tax implication is associated with leasing an asset?

Accepted Answer

Lease payments are deductible as expenses

Answer

No depreciation deductions are allowed

Answer

Sales tax is exempted

Answer

Property tax deductions are available

Question 30

Which factor is NOT relevant when evaluating a lease versus buy decision?

Accepted Answer

Brand recognition

Answer

Cost of ownership

Answer

Flexibility requirements

Answer

Tax implications

Question 31

Which option generally offers greater flexibility for businesses?

Accepted Answer

Leasing

Answer

Buying

Answer

Both are equally flexible

Answer

Neither is flexible

Question 32

Which method is used to calculate the present value of a lease payment?

Accepted Answer

Equivalent Annual Cost (EAC)

Answer

Net Present Value (NPV)

Answer

Internal Rate of Return (IRR)

Answer

Payback Period

Question 33

When evaluating lease or buy options, should opportunity cost be considered?

Accepted Answer

True

Answer

False

Question 34

To reduce the risk of using outdated equipment, which lease or buy strategy is most effective?

Accepted Answer

Short-term leasing

Answer

Long-term leasing

Answer

Purchasing the equipment

Question 35

When deciding between leasing and buying an asset, which of the following is NOT a primary factor to consider?

Accepted Answer

Brand recognition

Answer

Flexibility of use

Answer

Total cost of ownership

Answer

Tax implications

Question 36

Which of the following is an advantage of leasing over buying?

Accepted Answer

Lower upfront costs

Answer

Higher depreciation expenses

Answer

Greater tax benefits

Answer

Ownership of the asset

Question 37

Which of the following is a disadvantage of leasing over buying?

Accepted Answer

Limited flexibility

Answer

Shorter term commitments

Answer

Reduced tax liability

Answer

Lower maintenance costs

Question 38

Which of the following is a relevant tax implication to consider when making lease or buy decisions?

Accepted Answer

Depreciation deductions

Answer

Sales tax exemptions

Answer

Property tax assessments

Question 39

Which of the following is a qualitative factor that may influence a lease or buy decision?

Accepted Answer

Corporate image

Answer

Interest rates

Answer

Depreciation expense

Answer

Tax laws

Question 40

What is a primary advantage of leasing equipment?

Accepted Answer

Lower upfront capital investment

Answer

Flexibility in asset disposal

Answer

Ownership of the asset

Answer

Tax deductions for depreciation

Question 41

A company is considering buying equipment for $50,000. The equipment has a 5-year useful life and a salvage value of $5,000. The company's cost of capital is 12%. What is the annual depreciation expense using the straight-line method?

Accepted Answer

$9,000

Answer

$5,000

Answer

$10,000

Answer

$45,000

Question 42

A company has a 3-year lease on a forklift with annual payments of $12,000 due at the beginning of each year. The forklift's fair market value is $30,000 at lease end. The company has the option to buy the forklift then for $10,000. Which scenario would make exercising the purchase option beneficial?

Accepted Answer

The fair market value of the forklift is expected to rise significantly after the lease term.

Answer

The lease payments are considered too high.

Answer

The company no longer needs the forklift after the lease term.

Question 43

A company's cost of capital is 10%. The company considers leasing a truck for 5 years, with annual payments of $10,000 due at the beginning of each year.  What is the present value of these lease payments?

Accepted Answer

$37,908

Answer

$34,453

Answer

$50,000

Answer

$41,699

Question 44

A company is analyzing whether to lease a piece of equipment for 5 years. The annual lease payment is $10,000, and the equipment is projected to have a $5,000 salvage value at the end of the lease. With a discount rate of 10%, what is the present value of the lease payments?

Accepted Answer

$37,907

Answer

$45,000

Answer

$32,230

Answer

$43,553

Question 45

Which of the following is NOT typically considered an advantage of leasing equipment compared to buying it?

Accepted Answer

Lower total cost of ownership over the asset's life.

Answer

Potential tax benefits associated with lease payments.

Answer

Increased flexibility to upgrade or replace equipment.

Answer

Reduced upfront capital expenditure requirements.

Question 46

A company purchases equipment for $100,000, expecting a useful life of 10 years and a salvage value of $10,000.  Assuming a 30% tax rate and straight-line depreciation, what is the annual depreciation expense?

Accepted Answer

$9,000

Answer

$10,000

Answer

$6,300

Answer

$7,000

Question 47

When making a lease or buy decision, which of the following factors requires financial consideration?

Accepted Answer

The asset's estimated residual value at the end of the lease.

Answer

The availability of a manufacturer's warranty on the equipment.

Answer

The reputation of the equipment supplier in the market.

Answer

The equipment's aesthetic features, such as its color.

Question 48

A company is offered a lease agreement for equipment with a fair market value of $100,000. The lease includes a purchase option at the end of the term for $20,000.  Can the implied interest rate on this lease be determined solely from this information?

Accepted Answer

No, additional information like the lease term and payment schedule is needed.

Answer

Yes, it is 20% based on the difference between the market value and option price.

Answer

Yes, it is 80% based on the ratio of the option price to the market value.

Question 49

A company with a 10% discount rate evaluates a 5-year lease with annual payments of $10,000. Calculate the present value of these lease payments.

Accepted Answer

$37,907

Answer

$31,685

Answer

$50,000

Answer

$41,699

Question 50

Which factor is LEAST likely to significantly influence a company's decision to lease or buy equipment?

Accepted Answer

The equipment's color or aesthetic appearance.

Answer

The company's access to capital and financing costs.

Answer

The company's current and projected corporate tax rate.

Answer

The desired length of the lease term and potential renewal options.

Question 51

What type of lease offers a purchase option significantly below the equipment's expected fair market value at the end of the lease term?

Accepted Answer

A bargain purchase option lease.

Answer

A finance lease.

Answer

An operating lease.

Answer

A capital lease.

Question 52

Concerning the tax implications of leasing, which statement is generally TRUE in the United States?

Accepted Answer

Lease payments are typically tax-deductible as business expenses.

Answer

Lease agreements lead to higher depreciation expenses compared to owning.

Answer

Only capital leases offer tax benefits; operating leases do not.

Answer

Leasing always results in greater total tax benefits than buying an asset.

Question 53

A company is considering leasing a piece of equipment that has a fair market value of $100,000. The lease agreement includes a purchase option at the end of the lease term for $20,000. What is the implied interest rate on the lease?

Accepted Answer

This cannot be determined from the information given.

Answer

10%

Answer

20%