Lease Financing: Leasing

Firms generally own fixed assets and report them on their balance sheets, but, it is the $--$Select$-$ of assets that is important, not their $--$Select$-$ per se$.$ Leasing is an alternative to borrowing to finance fixed assets. There are five different forms of leasing: sale$-$and$-$leaseback arrangements, operating leases, financial, or capital, leases, combination leases, and synthetic leases. Under a sale$-$and$-$leaseback arrangement, a firm that owns land, buildings, or equipment sells the property to another firm and simultaneously executes an agreement to lease the property back from the company. In a sale and leaseback, a firm sells land, buildings, or equipment and simultaneously leases the property back for a specified period under speciflc terms. In an operating lease, the lessor maintains and finances the property. This is also called a service lease. A financial lease does not provide for maintenance services, is not cancelable, and is fully amortized over its life.

Quantitative Problem $1$: Findley Furniture Company must install $$5\mathrm{.}6$ million of new equipment in one of its plants. It can obtain a bank loan for $100\%$ of the required amount. Alternatively, management believes it can arrange a lease. Assume that the following facts apply:

The equipment falls in the MACRS $5-$year class. The applicable MACRS rates are $20\%,32\%,19\%,12\%,11\%,$ and $6\%,$

The lease includes maintenance, whereas if the equipment is purchased, it would require maintenance provided by a service contract for $$150,000$ per year, payable at the end of the year.

Findley's federal$-$plus$-$state tax rate is $35\%.$

If the money is borrowed, the bank loan will be at a rate of $8\%,$ amortized in $5$ equal installments to be paid at the end of each year.

The tentative lease terms call for end$-$of$-$year payments of $$1\mathrm{.}10$ million per year for $5$ years.

At the end of the lease term, the equipment will have an estimated salvage value of $$950,000.$ At that time, Findley plans to replace the equipment regardless of whether the firm leases or purchases it$.$

What is the firm's cost of owning the equipment? Enter your answer in thousands. For example, an answer of $$1,234,000$ should be entered as $1,234.$ Do not round intermediate calculations. Round your answer to the nearest thousand dollars. Enter your answer as a positive number.

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Quantitative Problem $2$: Findley Furniture Company must install $$5\mathrm{.}6$ million of new equipment in one of its plants. It can obtain a bank loan for $100\%$ of the required amount. Alternatively, management believes it can arrange a lease. Assume that the following facts apply:

The equipment falls in the MACRS $5-$year class. The applicable MACRS rates are $18\%,33\%,17\%,14\%,13\%,$ and $5\%,$

The lease includes maintenance, whereas if the equipment is purchased, it would require maintenance provided by a service contract for $$180,000$ per year, payable at the end of the year.

Findley's federal$-$plus$-$state tax rate is $45\%.$

If the money is borrowed, the bank loan will be at a rate of $10\%,$ amortized in $5$ equal installments to be paid at the end of each year.

The tentative lease terms call for end$-$of$-$year payments of $$1\mathrm{.}35$ million per year for $5$ years.

At the end of the lease term, the equipment will have an estimated salvage value of $$900,000.$ At that time, Findley plans to replace the equipment regardless of whether the firm leases or purchases it$.$

What is the firm's cost of leasing the equipment? Enter your answer in thousands. For example, an answer of $$1,234,000$ should be entered as $1,234.$ Do not round intermediate calculations. Round your answer to the nearest thousand dollars. Enter your answer as a positive number.

$

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