Introduction of Managerial Finance

Task:
The purpose of this assignment is to explain core concepts related to lease vs. purchase and tactical financial decisions.
As an alternative to the borrow-and-buy plan, the equipment manufacturer informed Lewis that Consolidated Leasing would be willing to write a 4-year guideline lease on the equipment, including maintenance, for payments of $260,000 at the beginning of each year. Lewis’s marginal federal-plus-state tax rate is 40%. You have been asked to analyze the lease-versus-purchase decision and, in the process, to answer the following questions: 
a.(1) Who are the two parties to a lease transaction?
(2) What are the five primary types of leases, and what are their characteristics?
(3) How are leases classified for tax purposes?
(4) What effect does leasing have on a firm’s balance sheet?
(5) What effect does leasing have on a firm’s capital structure?
b. (1) What is the present value of owning the equipment? (Hint: Set up a timeline that shows the net cash flows over the period t = 0 to t = 4, and then find the PV of these net cash flows, or the PV cost of owning.)
(2) Explain the rationale for the discount rate you used to find the PV.
c. What is Lewis’s present value of leasing the equipment? (Hint: Again, construct a timeline.)
d. What is the net advantage to leasing (NAL)? Does your analysis indicate that Lewis should buy or lease the equipment? Explain.
e. Now assume that the equipment’s residual value could be as low as $0 or as high as $400,000, but $200,000 is the expected value. Because the residual value is riskier than the other relevant cash flows, this differential risk should be incorporated into the analysis. Describe how this could be accomplished. (No calculations are necessary, but explain how you would modify the analysis if calculations were required.) What effect would the residual value’s increased uncertainty have on Lewis’ lease-versus-purchase decision?
f. The lessee compares the present value of owning the equipment with the present value of leasing it. Now put yourself in the lessor’s shoes. In a few sentences, how should you analyze the decision to write or not to write the lease?  



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