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Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current market prices
Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current market prices and other information from several online data services and then either displays the information on a screen or stores it for later retrieval by the firms brokers. The system also permits customers to call up current quotes on terminals in the lobby. The equipment costs $ and, if it were purchased, Lewis could obtain a term loan for the full purchase price at a interest rate. Although the equipment has a year useful life, it is classified as a specialpurpose computer and therefore falls into the MACRS year class. If the system were purchased, a year maintenance contract could be obtained at a cost of $ per year, payable at the beginning of each year. The equipment would be sold after years, and the best estimate of its residual value is $ However, because realtime display system technology is changing rapidly, the actual residual value is uncertain. As an alternative to the borrowandbuy plan, the equipment manufacturer informed Lewis that Consolidated Leasing would be willing to write a year guideline lease on the equipment, including maintenance, for payments of $ at the beginning of each year. Lewiss marginal federalplusstate tax rate is You have been asked to analyze the leaseversuspurchase decision and, in the process, to answer the following questions. a Who are the two parties to a lease transaction? What are the five primary types of leases, and what are their characteristics? How are leases classified for tax purposes? What effect does leasing have on a firms balance sheet? What effect does leasing have on a firms capital structure? b What is the present value cost of owning the equipment? Hint: Set up a time line that shows the net cash flows over the period t to t and then find the PV of these net cash flows, or the PV cost of owning. Explain the rationale for the discount rate you used to find the PV What is Lewiss present value cost of leasing the equipment? Hint: Again, construct a time line. What is the net advantage to leasing NAL Does your analysis indicate that Lewis should buy or lease the equipment? Explain. e Now assume that the equipments residual value could be as low as $ or as high as $ but $ is the expected value. Because the residual value is riskier than the other relevant cash flows, this differential risk should be incorporated into the analysis. Describe how this could be accomplished. No calculations are necessary, but explain how you would modify the analysis if calculations were required. What effect would the residual values increased uncertainty have on Lewiss leaseversuspurchase decision? The lessee compares the cost of owning the equipment with the cost of leasing it Now put yourself in the lessors shoes. In a few sentences, how should you analyze the decision to write or not to write the lease?
Lewis Securities Inc. has decided to acquire a new market data and quotation system for its Richmond home office. The system receives current market prices and other information from several online data services and then either displays the information on a screen or stores it for later retrieval by the firms brokers. The system also permits customers to call up current quotes on terminals in the lobby.
The equipment costs $ and, if it were purchased, Lewis could obtain a term loan for the full purchase price at a interest rate. Although the equipment has a year useful life, it is classified as a specialpurpose computer and therefore falls into the MACRS year class. If the system were purchased, a year maintenance contract could be obtained at a cost of $ per year, payable at the beginning of each year. The equipment would be sold after years, and the best estimate of its residual value is $ However, because realtime display system technology is changing rapidly, the actual residual value is uncertain.
As an alternative to the borrowandbuy plan, the equipment manufacturer informed Lewis that Consolidated Leasing would be willing to write a year guideline lease on the equipment, including maintenance, for payments of $ at the beginning of each year. Lewiss marginal federalplusstate tax rate is You have been asked to analyze the leaseversuspurchase decision and, in the process, to answer the following questions.
a Who are the two parties to a lease transaction?
What are the five primary types of leases, and what are their characteristics?
How are leases classified for tax purposes?
What effect does leasing have on a firms balance sheet?
What effect does leasing have on a firms capital structure?
b What is the present value cost of owning the equipment? Hint: Set up a time line that shows the net cash flows over the period t to t and then find the PV of these net cash flows, or the PV cost of owning.
Explain the rationale for the discount rate you used to find the PV
What is Lewiss present value cost of leasing the equipment? Hint: Again, construct a time line.
What is the net advantage to leasing NAL Does your analysis indicate that Lewis should buy or lease the equipment? Explain.
e Now assume that the equipments residual value could be as low as $ or as high as $ but $ is the expected value. Because the residual value is riskier than the other relevant cash flows, this differential risk should be incorporated into the analysis. Describe how this could be accomplished. No calculations are necessary, but explain how you would modify the analysis if calculations were required. What effect would the residual values increased uncertainty have on Lewiss leaseversuspurchase decision?
The lessee compares the cost of owning the equipment with the cost of leasing it Now put yourself in the lessors shoes. In a few sentences, how should you analyze the decision to write or not to write the lease?
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