Self-Test Problems

(Solutions in Appendix)

  1. Learning Goal 2

    ST17–1 Lease versus purchase The Hot Bagel Shop wishes to evaluate two plans for financing an oven: leasing and borrowing to purchase. The firm is in the 40% tax bracket.

    • Lease The shop can lease the oven under a 5-year lease requiring annual end-of-year payments of $5,000. All maintenance costs will be paid by the lessor, and insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the asset for $4,000 at termination of the lease.

    • Purchase The oven costs $20,000 and will have a 5-year life. It will be depreciated under MACRS using a 5-year ...

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