Scribd
Upload
19 views39 pages

CF_Chap-21

Uploaded by

23005230
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
19 views39 pages

CF_Chap-21

Uploaded by

23005230
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 39

CHAPTER 21

LEASING
LEASE CONTRACT
A lease is a contractual agreement between a lessee and a lessor. The
agreement establishes that the lessee has the right to use an asset and
in return must make periodic payments to the lessor, the owner of the
asset.
Lessor (Người cho thuê): is either the asset’s manufacturer or an
independent leasing company.
Lessee (Người thuê): has the right to use assets and in return make
periodic payments to the lessor.
The lessor owns the asset and for a fee allows the lessee to use the
asset.
LEASE CONTRACT
Operating lease Financial lease

Usually not fully amortized Financial leases are fully amortized.

Have a life that is less than the The lessee usually has a right to renew
economic life of the asset the lease at expiry.

Usually require the lessor to maintain Do not provide for maintenance or


and insure the asset service by the lessor.

Can often be canceled by the lessee Generally, financial leases cannot be canceled.
Company X has determined that it needs a new machine which will save $6,000 per
year in reduced electricity bills for the next five years.

That machine can be purchased for $10,000.

A leasing company has offered to lease the same machine to X for $2,500 per year
for 5 years. With the lease, company X would remain responsible for maintenance,
insurance, and operating expenses.

Tax rate (TC ) = 21%.


Company X has determined that it needs a new machine which will save $6,000 per
year in reduced electricity bills for the next five years.

That machine can be purchased for $10,000.

A leasing company has offered to lease the same machine to X for $2,500 per year
for 5 years. With the lease, company X would remain responsible for maintenance,
insurance, and operating expenses.

Tax rate (TC ) = 21%.


After-tax operating saving = 6,000 *(1-0.21) = 4,740
Tax Benefits = 0.21 * 2,500 = 525
Example 2:
- Wolfson Corporation has decided to purchase a new machine that costs $1 million. The
machine will be depreciated on a straight-line basis and will be worthless after four years. The
corporate tax rate is 24%.
- Cal Leasing Corporation offers to lease the same machine to Wolfson. Lease payments of
$500,000 per year are due at the beginning of each of the four years of the lease.

What is the CF of buy and lease?


Example 2:
- Wolfson Corporation has decided to purchase a new machine that costs $1 million. The
machine will be depreciated on a straight-line basis and will be worthless after four years. The
corporate tax rate is 24%.
What is the CF of buy

Unit: thousand dollars


Example 2:
- Cal Leasing Corporation offers to lease the same machine to Wolfson. Lease payments of
$500,000 per year are due at the beginning of each of the four years of the lease.

What is the CF of lease?

Unit: thousand dollars


Example 2:
- Gongcha has decided to purchase a new machine that costs $654, which will save $750 per
year in reduced electricity bills for the next 4 years. The machine will be depreciated on a
straight-line basis and will be worthless after 4 years. The corporate tax rate is 22%.
- Cal Leasing Corporation offers to lease the same machine to Wolfson. Lease payments of
$200 per year are due of each of the four years of the lease.

What is the CF of buy and lease?


a) If the lease payment are due at the begining of the year?
b) If the lease payment are due at the end of the year?
NPV ANALYSIS OF THE
LEASE-VERSUS-BUY
DECISION
Leasing or Buying?
Method 1: Compute the incremental cash flows of leasing versus
buying (L-B). Then, discount all cash flows at the aftertax interest rate

NPV we have computed here is often called Net advantage to leasing (NAL)

=> NPV or NAL < 0: Company X prefers to purchase the machine


Leasing or Buying?
Method 2: Compute the incremental cash flows of buying versus
leasing (B-L). Then, discount all cash flows at the aftertax interest rate

=> NPV > 0: Company X prefers to purchase the machine


Quick tip calculation
Suppose that the
company can either
borrow or lend at
the interest rate of 8
percent. Should the
firm lease or buy?
Given the tax rate is
21%.
Suppose that the company can either borrow or lend at the interest rate of 8 percent.
Should the firm lease or buy? Given the tax rate is 21%.

NPV (L-B) or NAL < 0 => the firm should buy the machine
Lmin and Lmax
CFs of the lessee or lessor
CFs of the lessee or lessor
CFs of the lessee or lessor
Suppose that Company X pays no tax and the lease payments are reduced to $2,393
from $2,500
CFs of the lessee or lessor
Suppose that Company X pays no tax and the lease payments are reduced to $2,393
from $2,500

=> Both the lessor and the lessee can gain if their tax rates are
different
CFs of the lessee or lessor

Because both parteis can gain when tax rates differ, the lease
payment is agreed upon through negotiation.

Reservation Payment of Lessee => Lmax


Reservation Payment of Lessor => Lmin
Findings the Lmax
Findings the Lmin
Quartz Corporation is a relatively new firm. Quartz has experienced enough
losses during its early years to provide it with at least eight years of tax loss
carryforwards, so Quartz's effective tax rate is zero.
Quartz plans to lease equipment from New Leasing Company. The term of the
lease is five years. The purchase cost of the equipment is $680,000. New
Leasing Company is in the 23 percent tax bracket.
Each firm can borrow at 9 percent.

a. What is Quartz's reservation price?


b. What is New Leasing Company's reservation price?
c. Explain why these reservation prices determine the negotiating range of the
lease.
c. A lease payment less than $174,357.08 will give the lessor a negative NAL. A
payment higher than $174,822.87 will give the lessee a negative NAL. In either
case, no deal will be struck. Therefore, these represent the lower and upper
bounds of possible lease prices during negotiations.
Exercise
(Exercise 1, textbook p673) You work for a nuclear research laboratory that is contemplating
leasing a diagnostic scanner (leasing is a common practice with expensive, high-tech
equipment). The scanner costs $4.3 million and would be depreciated straight-line to zero over
four years. Because of radiation contamination, it will actually be completely valueless in four
years. You can lease it for $1.275 million per year for four years. Assume that the tax rate is 21
percent. You can borrow at 8 percent before taxes. Should you lease or buy?
Exercise
Exercise
Exercise
Exercise
Kaleidescope Entertainment is considering buying a machine that
costs $625,000. The machine will be depreciated over five years by
the straight-line method and will be worthless after five years. The
company can lease the machine with year-end payments of $155,000.
The company can issue bonds at an interst rate of 7 percent. If the
corporate tax rate is 21 percent, should the company buy or lease?
Exercise
Exercise
Exercise

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy