Chapter 21, Problem 4MC

How do you treat repair and maintenance costs in lease versus purchass decision? Fewa's management has been considering moving to a new downtown location and they are concerned that these plans may come to fruition prior to the expiration of the lease. If the move occurs, Fewa would buy or lease an entirely new set of equipment, and hence management would like to include a cancellation clause in the lease contract. What impact would such a clause have on the riskiness of the lease from Fewa's standpoint? From the lessor's standpoint? If you were the lessor, would you insist on changing any of the lease terms if a cancellation clause were added?

Salaur Company, a risky start-up, is evaluating a lease arrangement being offered by TSP Company for use of a standard computer system. The lease is non-cancelable, and in no case does Salaur receive title to the computers during or at the end of the lease term. TSP will lease the returned computers to other customers. The lease starts on January 1, 2020, with the first rental payment due on January 1, 2020. Additional information related to the lease and the underlying leased asset is as follows. Yearly rental   $3,057.25   Lease term   3 years   Estimated economic life   5 years   Purchase option   $3,000 at end of 3 years, which approximates fair value   Renewal option   1 year at $1,500; no penalty for nonrenewal; standard renewal clause   Fair value at commencement   $10,000   Cost of asset to lessor   $8,000   Residual value:         Guaranteed   –0–     Unguaranteed   $3,000   Lessor’s implicit rate (known by the lessee)   12%   Estimated fair value at…

Salaur Company, a risky start-up, is evaluating a lease arrangement being offered by TSP Company for use of a standard computer system. The lease is non-cancelable, and in no case does Salaur receive title to the computers during or at the end of the lease term. TSP will lease the returned computers to other customers. The lease starts on January 1, 2020, with the first rental payment due on January 1, 2020. Additional information related to the lease and the underlying leased asset is as follows. Yearly rental   $3,057.25   Lease term   3 years   Estimated economic life   5 years   Purchase option   $3,000 at end of 3 years, which approximates fair value   Renewal option   1 year at $1,500; no penalty for nonrenewal; standard renewal clause   Fair value at commencement   $10,000   Cost of asset to lessor   $8,000   Residual value:         Guaranteed   –0–     Unguaranteed   $3,000   Lessor’s implicit rate (known by the lessee)   12%   Estimated fair value at…