Exam 2 Fin 320 - Lecture 10 / Chapter 19

What are the two parties to a lease transaction?

The lessee uses the asset; the lessor owns it.

What defines an operating lease?

Short-term, usually cancelable, maintenance included.

What distinguishes a financial lease from an operating lease?

Long-term, non-cancelable, maintenance not included.

What is a guideline lease?

Complies with IRS requirements, allowing tax deductions for lessees.

What happens if a lease does not meet tax guidelines?

It becomes a non-tax-oriented lease, affecting ownership and deductions.

What is the maximum lease term for a guideline lease?

Cannot exceed 80% of the asset's useful life.

What is the implication of a lessee being the effective owner in a non-tax-oriented lease?

The lessee can depreciate the asset for tax purposes.

How is the initial lease liability calculated?

Present value of all future lease payments.

What is the formula for calculating new lease liability each year?

Previous liability plus imputed interest minus lease payment.

What is the appropriate discount rate for lease analysis?

The cost of debt.

What tax benefits does a lessee receive in a tax-oriented lease?

Can deduct the full lease payment from taxable income.

What is the net advantage to leasing (NAL)?

Difference between the present value of leasing and owning costs.

What is the effect of maintenance costs in lease analysis?

They impact the overall cost comparison between leasing and buying.

What happens to the residual value in a tax-oriented lease?

The lessor retains ownership and any residual value after the lease.

What is the tax treatment of lease payments in a non-tax-oriented lease?

Only the interest portion can be deducted.

What is the significance of the MACRS depreciation schedule?

It determines the depreciation expense for tax purposes.