1. The following are sensible reasons for leasing:
I) Short-term leases are convenient.
II) Standardization leads to low administrative and transaction costs for the lessor.
III) Lease cancellation options are valuable.
IV) Tax shields can be used.
2. The L Company is considering a new office computer system. They can purchase the system for $15,000. If the computer system is purchased, it will be depreciated straight line over a five year life to a zero salvage value. However, they estimate that it could be sold for $4,000 at that time. Alternatively, L Company could lease the computer system for six payments of $2,800, with the first payment due immediately. L Company's before tax cost of debt is 9% and its marginal tax rate is 34%. The cost of leasing minus the cost of purchasing is:
-$132
$926
$1,249
-$311