Your firm is considering leasing a radiographic x-ray machine. The lease lasts for 3 years. The lease calls for 4 payments of $25,000 per year with the first payment occurring immediately. The computer would cost $140,000 to buy and would be straight-line depreciated to a zero salvage value over 3 years. The actual salvage value is negligible. The firm can borrow at a rate of 12%. The corporate tax rate is 40%. This lease would be classified as a(n):
A) operating lease because the asset will be obsolete.
B) operating lease because there is no amortization.
C) leveraged lease because it is being financed.
D) capital lease because the lease life is greater than 75% of the economic life.

Question

Quizplus · Accepted Answer

Capital leases are characterized by the lease term being greater than 75% of the asset's economic life. Since the lease lasts for 3 years, which is the full economic life of the asset (as it is depreciated to zero over this period), it meets this criterion.

Your Firm Is Considering Leasing a Radiographic X-Ray Machine