The decision rule for a lease versus buy decision is "buy if the equivalent annual cost...

The decision rule for a lease versus buy decision is "buy if the equivalent annual cost of ownership and operation is greater than the best rate you can get from an outsider (lessor)."

True or False?

Please explain

Solutions

Expert Solution

The correct answer is False

Leasing refers to the grant of use of the asset by the lessor in exchange of the payments for a specific period of time while buying refers to purchasing the assets in order to get the ownership right.

The equivalent cost of the ownership is calculated and if the equivalent cost is lower then only the buying decision is considered over leasing. Therefore, the statement is false

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

In a lease-versus-buy analysis, the correct comparison is the cost of lease financing versus the cost...

In a lease-versus-buy analysis, the correct comparison is the cost of lease financing versus the cost of the alternative financing method to be used if the asset is not leased. True False

Why is the equivalent annual cost method potentially useful in decision making? Why would you use...

Why is the equivalent annual cost method potentially useful in decision making? Why would you use the real discount rate to compute the EAC? What problem(s) do you see with using the equivalent annual cost method to evaluate a company's options?

Assume that you are examining a lease versus buy analysis and you suddenly realize that the...

Assume that you are examining a lease versus buy analysis and you suddenly realize that the residual value is considered to be more risky than the rest of the cash flows. Then, which of the following is correct? A. If the residual value were included as an outflow (a negative cash flow), the increased risk would be reflected by applying a lower discount rate to the residual value cash flow. B. The discount rate applied to the cash flows is...

The Decision to Lease or Buy at Warf Computers Warf Computers has decided to proceed with...

The Decision to Lease or Buy at Warf Computers Warf Computers has decided to proceed with the manufacture and distribution of the virtual keyboard (VK) the company has developed. To undertake this venture, the company needs to obtain equipment for the production of the microphone for the keyboard. Because of the required sensitivity of the microphone and its small size, the company needs specialized equipment for production. Nick Warf, the company president, has found a vendor for the equipment. Clapton...

Proof that the NPV rule is equivalent to the rate of return rule if the investment...

Proof that the NPV rule is equivalent to the rate of return rule if the investment period is 1 Year.

explain at least 3 factors that pertain to your decision to either buy or lease your...

explain at least 3 factors that pertain to your decision to either buy or lease your next vehicle. 0

Car decision. Assume you need a car and you are evaluating lease vs. buy options. The...

Car decision. Assume you need a car and you are evaluating lease vs. buy options. The buying option is with auto loan at interest rate of 3%. The dealer offers you the following. Lease option: $2,000 security deposit, $500 monthly payment for 48 months. Expected end of lease charges are $600. Purchase option: $4,000 down payment, $600 monthly payment for 48 months. At the end the car is estimated to have resale value of $8,000. Do the proper analyses and...

state some of the effects of an operating lease versus a capital lease; this is with...

state some of the effects of an operating lease versus a capital lease; this is with reference to the restatement of an operating lease to a capital lease.

Lease versus Buy Big Sky Mining Company must install $1.5 million of new machinery in its...

Lease versus Buy Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply: The machinery falls into the MACRS 3-year class. (The depreciation rates for Year 1 through Year 4 are equal to 0.3333, 0.4445, 0.1481, and 0.0741.) Under either the lease or the purchase, Big Sky must pay for insurance,...

Lease versus Buy Big Sky Mining Company must install $1.5 million of new machinery in its...

Lease versus Buy Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply: The machinery falls into the MACRS 3-year class. Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance. The firm's tax rate is 30%. The loan would have an interest rate...

Subjects