Management of LLW Cabinetry, Inc., is considering leasing a new saw that will greatly increase the plant’s throughput. Information on the machine and the terms of the lease are as follows: The machine has a fair market value of $ 2. 8 million, an estimated useful life of ten years, and no salvage value. Company incremental borrowing rate is 11.5%. Lease term of seven years with lease payments of $ 41567 due at the beginning of each month. Implicit lease rate is 10.0%. The lease does not contain a bargain purchase option, and there is no title transfer at the end of the lease. If management leases the machine (Note : carry calculations to at least three decimal places) :（）
A. the current ratio is unaffected (all else equal).
B. the lease period is greater than 75% of the asset’ s useful life.
C. in the first month, cash flow from operations will decrease by approximately $ 21039.
参考答案：C
解析：
As shown below, the present value of the lease payments is slightly greater than 90% of the fair market value of the lease, and thus the lease would meet the criteria for a capital lease. Cash flow from operations in the first month will be reduced by the present value of the lease payments (calculated below) times the discount rate (here the implicit lease rate). The trick here is to calculate the present value of the lease payments with your calculator in BEGIN mode since the lease payments are made at the beginning of the month. Then, FV =0 (no salvage). N =84 (use lease term of 7 years times 12 months). I/Y = 10/12 (use the lower of the incremental borrowing rate or implicit lease rate). PMT =41567. Compute PV = -2524723, or 90. 169% of the fair market value of $ 2800000. Thus, the lease meets one of the criteria for a capital lease. In the first month, cash flow from operations will decrease by 2524723×0.10/12, or approximately $ 21039. The other statements are false. Since the lease should be capitalized, the current portion due will increase current liabilities and thus impact the current ratio. The lease period is less than 75% of the asset’ s useful life (7/10 =70.0% ). Since the lease then would not meet any of the criteria for a capital lease (lessee) , it would be booked as an operating lease, and the entire lease payment would reduce cash flow from operations.