Question Details

(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

 


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