Sizzler's is considering either purchasing or leasing an asset that costs $28,000,has a life of 6 years,and a zero salvage value.The firm has a tax rate of 21 percent and a borrowing rate of 7 percent.The firm can lease the asset for five years with lease payments of $4,500 payable the first of each year.This lease would be classified as a(n):

Question

Quizplus · Accepted Answer

Based on the given information, the lease would be classified as a capital lease because the lease term (5 years) is greater than 75 percent (4.5 years) of the asset's economic life (6 years). Therefore, Sizzler's should consider purchasing the asset through a capital lease rather than leasing it for 5 years, as it would have greater control and ownership of the asset and potentially save on lease payments in the long run. Additionally, since the firm has a tax rate of 21 percent and a borrowing rate of 7 percent, it may be beneficial to take advantage of the tax benefits of debt financing by using a loan to purchase the asset.

Sizzler's Is Considering Either Purchasing or Leasing an Asset That