(solution) As a baseline, assume all cash flows have the same risk; that is,

(solution) As a baseline, assume all cash flows have the same risk; that is,

As a baseline, assume all cash flows have the same risk; that is, ignore residual value risk and use the same discount rate for all lessee and lessor cash flows.

Should the Center lease the equipment?  Should GBF write the lease?

Who is getting the better deal?  Explain.

What is the maximum lease payment that the Center would be willing to pay? 

What factor influence whether the actual lease payment will be closer to the Center?s maximum lease payment or GBF?s minimum lease payment?

This lease is attractive to both parties because there is asymmetry of inputs between the lessee and lessor.

What are these asymmetries?

What would be the result if there were no asymmetries?  Prove it.

Model CASE 17
9/25/2016 Student Version
SEATTLE CANCER CENTER
Leasing Decisions This case illustrates the lease versus purchase decision from the standpoints of both the lessee
and the lessor.
The model calculates the NAL (or NPV) and IRR of the lease for both parties on the basis of
relevant input data. The invoice price and lease rental payments must be the same for both
parties, but the other input variables may be different for each party. The model also examines
the differential profitability to the lessee between conventional and per procedure leases.
The model consists of a complete base case analysis–no changes need to be made
to the existing MODEL-GENERATED DATA section. However, all values in the student version
INPUT DATA section have been replaced with zeros. Thus, students must determine
the appropriate input values and enter them into the model. These cells are colored red.
When this is done, any error cells will be corrected and the base case solution will appear.
Note that the model does not contain any risk analyses, so students will have to create
their own if required by the case. Furthermore, students must create their own graphics
(charts) as needed to present their results.
Both instructor and student versions contains a sheet (Figure 1) that plots lessee's NAL,
lessor's NPV, and total contract value versus the size of the lease payment. INPUT DATA: KEY OUTPUT: General Data:
Invoice price
Annual lease payment
Net revenue per procedure
Per procedure lease payment Lessee:
$3,000,000
$675,000
$10,000
$7,000 For Lessee Only:
Maintenance contract cost
Loan interest (discount) rate
Estimated residual value
Residual value discount rate
Tax rate $100,000
8.0%
$1,125,000
8.0%
0.0% For Lessor Only: NAL
IRR
Lessor:
Unleveraged lease:
NPV
IRR
Leveraged lease:
NPV
IRR
Per Procedure Versus Annual Lease:
(Volume = procedures annually) Page 1 Model Maintenance contract
Opportunity cost rate
Estimated residual value
Residual value discount rate
Tax rate
Leveraged lease inputs:
Amount borrowed
Interest rate $100,000
8.0%
$1,500,000
8.0%
40.0% Per procedure lease
Annual lease
Difference $1,500,000
8.0% MODEL-GENERATED DATA:
MACRS Depreciation Table: Year
1
2
3
4
5
6 MACRS
Rate
0.20
0.32
0.19
0.12
0.11
0.06 Basis
$3,000,000
3,000,000
3,000,000
3,000,000
3,000,000
3,000,000 Depreciation
Expense
$600,000
960,000
570,000
360,000
330,000
180,000
$3,000,000 Ending
Book Value
$2,400,000
1,440,000
870,000
510,000
180,000
0 Lessee's Annual Analysis:
Base Discount Rate:
Residual Value Discount Rate: 8.0%
8.0% Cost of Owning: Equipment cost
Maintenance
Maint tax savings
Depreciation shield
Residual value
Residual value tax Year 0
($3,000,000)
(100,000)
0 Net owning CF ($3,100,000) PV cost owning: ($2,530,801) Year 1 Year 2 Year 3 ($100,000)
0
0 ($100,000)
0
0 ($100,000)
0
0 ($100,000) ($100,000) ($100,000) Cost of Leasing:
Page 2 Model Lease payment
Payment tax savings ($675,000)
0 ($675,000)
0 ($675,000)
0 ($675,000)
0 Net leasing CF ($675,000) ($675,000) ($675,000) ($675,000) PV cost leasing: ($2,414,540) NAL = PV cost of leasing – PV cost of owning = $116,261 Net Cost of Leasing versus Owning:
Lease CF – Own CF $2,425,000 ($575,000) Lessee's IRR = ($575,000) ($575,000) 6.0% Lessor's Annual Analysis:
Base Discount Rate:
Residual Value Discount Rate: 4.8%
4.8% Cash Flow Analysis: Equipment cost
Maintenance
Maint tax savings
Depreciation shield
Lease payment
Tax on payment
Residual value
Residual value tax
Net cash flow Year 0
($3,000,000)
(100,000)
40,000 Year 1 Year 2 Year 3 675,000
(270,000) ($100,000)
40,000
240,000
675,000
(270,000) ($100,000)
40,000
384,000
675,000
(270,000) ($100,000)
40,000
228,000
675,000
(270,000) ($2,655,000) $585,000 $729,000 $573,000 Lessor's NPV =
Lessor's IRR = $99,368
6.2% Leveraged Lease: Unleveraged CF
Unleveraged CF
Loan amount Year 0
($2,655,000) Year 1
$585,000 1,500,000
Page 3 Year 2
$729,000 Year 3
$573,000 Model Interest
Int tax savings
Principal repay
Net cash flow ($1,155,000) (120,000)
48,000 (120,000)
48,000 (120,000)
48,000 $513,000 $657,000 $501,000 Lessor's NPV =
Lessor's IRR = $99,368
10.6% Lease Payment Analysis Graphics Data:
(Note: This table does NOT automatically recalculate when input values are changed.) Lease Payment
$600,000
$620,000
$640,000
$660,000
$680,000
$700,000
$720,000 Lessee's
NAL
$0
$0
$0
$0
$0
$0
$0 Lessor's
NPV
$0
$0
$0
$0
$0
$0
$0 Total
Value
$0
$0
$0
$0
$0
$0
$0 Lessee's Per Procedure Analysis: Num
of
Proc
70
80
90
100
110
120
130 Per Procedure Lease
Annual
Annual
Lease
Net
Payment
Revenue
$490,000
$700,000
$560,000
$800,000
$630,000
$900,000
$700,000
$1,000,000
$770,000
$1,100,000
$840,000
$1,200,000
$910,000
$1,300,000 Annual
Profit
$210,000
$240,000
$270,000
$300,000
$330,000
$360,000
$390,000 Page 4 Annual
Lease
Payment
$675,000
$675,000
$675,000
$675,000
$675,000
$675,000
$675,000 Annual Lease
Annual
Net
Revenue
$700,000
$800,000
$900,000
$1,000,000
$1,100,000
$1,200,000
$1,300,000 Model Copyright 2014
by FACHE oth the lessee e basis of
e for both
so examines dent version appear. raphics $116,261
6.0% $99,368
6.2% $99,368
10.6% sus Annual Lease:
dures annually)
Page 5 Model Profit
$300,000
325,000
($25,000) Year 4 $0
1,125,000
0
$1,125,000 Page 6 Model $0 ($1,125,000) Year 4 $144,000 1,500,000
(396,000)
$1,248,000 Year 4
$144,000 All except RV flows
1,104,000 RV flows
Page 7 Model (120,000)
48,000
(1,500,000)
($324,000) al Lease
Annual
Profit
$25,000
$125,000
$225,000
$325,000
$425,000
$525,000
$625,000 Profit
Difference
$185,000
$115,000
$45,000
($25,000)
($95,000)
($165,000)
($235,000) END Page 8