The Point Where a Lessee Is Indifferent Between Leasing and Buying

question 21

Multiple Choice

The point where a lessee is indifferent between leasing and buying is the point where the:

• A) Total cash outlays for lease payments are equivalent to the purchase cost of the asset.
• B) Net present value from leasing is equal to zero.
• C) Total cash flows minus the depreciation tax shield are equal to zero.
• D) Tax savings from leasing equal the tax savings from buying.
• E) Net present value from leasing is positive.

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Definitions:

Sales Price

The amount of money charged for a product or service; the price for which something is sold.

Production Cost

The total expense involved in manufacturing a product or providing a service, including raw materials, labor, and overhead costs.

Variable Costing

An accounting method that only includes direct variable costs in product cost calculations, excluding fixed manufacturing overhead.

Absorption Costing

An accounting practice that includes every cost associated with manufacturing, like direct materials, direct labor, and variable as well as fixed overhead expenditures, in determining a product's cost.