Begin with a fresh $($blank$)$ Excel sheet and name your file per the usual pattern.Daiwan Semiconductor Manufacturing Company Limited $($the $$Client$),$ together with its subsidiaries, manufactures, packages, tests, and sells integrated circuits and other semiconductor devices in Taiwan, China, Europe, the Middle East, Africa, Japan, the United States, and internationally. It provides complementary metal oxide silicon wafer fabrication processes to manufacture logic, mixed$-$signal, radio frequency, and embedded memory semiconductors.

Daiwan Semi has engaged your company to consult and advise on a planned asset acquisition.

The Client has a large backlog of customer orders among their automotive clients, in part due to chip shortages. Therefore, Daiwan needs to acquire a new machine used to lay silicon wafers onto computer processor chips in an effort to deliver finished product in a more timely fashion.

There are $2$ suppliers that could supply the new machinery that Daiwan needs: Howard Picard and Marcosoft. Each manufacturer offers both financing and leasing alternatives for each of their respective equipment offerings.

Daiwan Semi$$s CEO, Dr$.$ Wei, is an electrical engineer. He is a technological master but has limited understanding of finance. You will be presenting your results directly to him. Therefore, points are awarded for summarizing and simplifying your conclusions in a way that is suitable for your audience.

Using the case facts outlined below and the methods used in class, your task is to determine which of the options below you would recommend.

$1.$

Lease from Howard Picard

$2.$

Purchase from Howard Picard $($using debt financing$)$

$3.$

Lease from Macrosoft

$4.$

Purchase from Macrosoft $($using debt financing$)$

Your Excel file should show your work which demonstrates the rationale for your conclusions. Please be sure to include a brief rationale supporting your conclusions. Making reference to specific metrics is highly recommended.

Daiwan Semi$-$Conductors

$$

Uses a discount rate of $15\%$ for assessing all new investments of this type.

$$

Is subject to an income tax rate of $25\%$

$3$

Howard Picard $-$ The sale price, aka acquisition cost for the equipment is $$125,000.$

A$.$

The Lease from Howard Picard

i$.$

Has a duration of $5$ years

ii$.$

Has an annual lease payment of $$30,000($before tax$)$

iii.

Requires no Down Payment $($no initial investment$)$

B$.$

The Financing Option from Howard Picard

i$.$

Requires no down payment, i$.$e$.$ it is financed $100\%$ through debt, at $8\%$ an annual interest rate, with annual principal and interest payments. The loan will be repaid in full in $5$ years $(5$ total end$-$of$-$year payments$).$

ii$.$

The useful life of the asset is $5$ years, i$.$e$.$ after $5$ years it has no remaining value.

iii.

CCA $($depreciation for tax purposes$)$ is an equal $$25,000$ for each of the $5$ years of the asset$$s useful life.

Macrosoft$$s equipment costs $$150,000.$

A$.$

The Lease from Macrosoft

i$.$

Has a duration of $5$ years

ii$.$

Has an annual lease payment of $$36,000($before tax$)$

iii.

Requires no Down Payment $($no initial investment$)$

B$.$

The Financing Option from Macrosoft

i$.$

Requires a $$15,000$ down$-$payment, i$.$e$.$ it is financed $90\%$ through debt, at a $7\mathrm{.}5\%$ annual interest, with annual principal and interest payments. The loan will be repaid in full in $5$ years $(5$ total end$-$of$-$year payments$).$

ii$.$

The useful life of the asset is $5$ years, i$.$e$.$ after $5$ years it has no remaining value.

iii.

CCA $($depreciation for tax purposes$)$ is an equal $$30,000$ for each of the $5$ years of the asset$$s useful life.

$*$HINT $$ If you have organized your HP analysis well, then considering the MSFT alternative can be a very quick activity by creating a copy of your sheet and changing the relevant assumptions$/$inputs$.$

$**$You should have NO HARD$-$CODED cells, aside from input data; the key facts of the case given herein.

Assignment $2(15\%)$ Lease vs$.$ Buy Analysis $$ HST$330$ W$24$

$4$

Short Answers

$1.$

What is your conclusion and recommendation to Dr Wei as to the best alternative among those below? How did you determine this?

a$.$

Lease from Howard Picard

b$.$

Purchase from Howard Picard $($using debt financing$)$

c$.$

Lease from Macrosoft

d$.$

Purchase from Macrosoft $($using debt financing$)$

$2.$

After presenting your conclusion, Dr$.$ Wei replied to you saying,

$$Oops$,$ I forgot to mention that Macrosoft$$s equipment is higher quality than HP$$s and can therefore produce more products. We anticipate annual pre$-$tax Gross Margins of $$72,000$ as a direct result of using HP$$s machine and $$88,000$ from Macrosoft$$s machine.$$

Does this new information change your conclusion? Why?

$3.$

Dr$.$ Wei is a technological master, but he has little respect for the field of finance. He said:

a$.$

$$Sorry$,$ I have one more question before I pay your consulting fee. I don$$t understand your rationale. I have $$140,000$ in the bank. Why should I not just purchase HP$$s equipment with cash on hand, and place your report in the recycling bin?$$