Q1. If you were in the position of Roger Heskett, what alternatives do you have regarding the acquisition of the computer equipment for Professor Kahsay?

Q2. Why not lease the equipment?

Q3. Would you be prepared to sign the conditional sales contract as written? What changes would you make to it?

Roger Haskett On June 26, 2004, Roger Haskett, director of purchasing that the proposal involved a capital lease arrangement, and for Morrow University in San Antonio, Texas, was even though there was no policy to prevent capital leases evaluating a proposal negotiated by Professor Kahsay from being arranged the university did not typically enter from the engineering faculty to upgrade computer equipment in his engineering lab. Roger was concerned into such agreements Chapter 2 Supply Organization 55 Capital Leases EXHIBIT 1 Capital and Operating Leases if any of the following criteria are met, a lease must by classified as a capitale 1. Ownership of the property is transferred to the lessee at the end of the termos 2. The lease contains an option to purchase the property for less than a market 3. The lease term is greater than 75 percent of the property's estimated economice, or 4. The present value of the lease payments exceeds 90 percent of the fair market value of the property Operating Leases Any lease that is not a capital lease is an operating lease THE EQUIPMENT LEASE PROPOSAL On June 22 the purchasing department recendo MORROW UNIVERSITY With more than 1,100 faculty members and almost 30,000 undergraduate and graduate students, Morrow University from Professor Kabsay to leave eight so Curtis was recognized as a national leader in teaching as well as rescarch. Through its 12 faculties and schools and four Leasing (Menard). The payment schedule called form processors for his engineering laboratory from Me affiliated colleges, the university offered more than 60 different degree and diploma programs initial payment of S115.000 due on September 1, 2004 three annual payments of $90,000 due on March of The purchasing department's mandate was to maximize cach of the subsequent three years, and a purchase the value of funds spent on supplies, equipment, and services; ensure ethical buying practices; maintain good equipment would be $475.000, including interest Given of $90,000 due on February 28, 2008. The total cost of the supplier relations, and ensure compliance with the the nature and size of this request, Roger decided to deal regulations governing taxes, accounting procedures, and with this request personally other related university policies. The purchasing department Even though there was no policy to prevent capital was responsible for the acquisition of all goods and services leases from being arranged the university did not for the university except for construction contracts, reading enter into capital leases. In general, the purchasing material offered by the library system, items offered for department considered capital leases an expensive and resale by the campus bookstore, and purchases for the food problematic purchase arrangement that should seldom be services department undertaken. Exhibit I describes the differences between Most faculty and staff tended to handle their own capital and operating leases purchasing needs for low-value purchases, which had been In a subsequent discussion with Professora Raper made easier with online purchasing applications. For found out that Professor Kasay haaraneda capital purchases greater than $100,000, the purchasing because he did not have sufficient fun with his weal department assigned a senior buyer to monitor and assist operating budget to cover the cost of purchasing the throughout the acquisition process. Senior buyers were equipment outright Roger requested that Pole Kwa available from three functional areas: business items, change the lease to a purchase agreement with the equipment scientific items, and furniture/building items. supplier. Roer wanted to pay cash for the present value University procedures tried to maximize purchasing of the house approximately 35.000. However , Potene value and minimize vendor relations issues Prior to Kahwy was alumunt that he should handle the acquisition acquiring goods or services with a value in excess of out of his own budget and that any delays wouljoprire $7.500, two written quotes were required. Three quotes several important research projects. He was "This is the only way we can stay within my budget and have the equipment were required for acquisitions in excess of $10,000 and state policies required all acquisitions over $100,000 to be posted electronically to allow all potential vendors an just blocking academic progress" arrive on time. Several of my doctoral candidates and I hone important papers due for a worldwide conference and you are opportunity to quote. EXHIBIT 2 Conditional Sales Contract MENARD LEASING Attn: Roger Haskett We are pleased to present the following proposal as a basis for further discussion concerning the financing by Menard Leasing of your planned equipment acquisitions. We appreciate the opportunity to make this proposal to you. Menard Leasing looks forward to working with you to complete this transaction LESSEE: Morrow University EQUIPMENT: (2) Curtis SV1 Module with (4) 2.1 FJLOP Processors & Full Care Warranty until February 28, 2008 (as described in attached quotations) TERM: 42 months, commencing September 1, 2004, or 15 days after delivery of processors. ESTIMATED PAYMENT: $115,000.00 due September 1, 2004, followed by 3 annual payments of $90,000.00 commencing March 1, 2005, payable in U.S. funds, with all applicable taxes. ACTUAL PAYMENT: The Estimated Monthly Payment is based on' Menard's cost of funds on the date of this letter and, to arrive at the Actual Monthly Payment, it will be adjusted upward or downward to reflect changes in interest rates. END OF LEASE 1) Purchase for $90,000.00 February 28, 2008. CONDITIONS: 2) The absence of any material adverse changes in the Lessee's financial health or creditworthiness prior to the Funding Date. 3) The completion and due execution and delivery of Menard's standard form of Master Lease/Lease Arrangement, Delivery & Acceptance Certificate and other documents, as Menard may reasonably require, all such documents to be in form and substance satisfactory to Menard in all respects, such documents will supercede this letter once executed and delivered. 4) The acceptance of this proposal by the Lessee by June 28, 2004. 5) Lessee agrees to install and accept the Equipment set forth within ten (10) days of delivery or notify the Lessor of any problems with the Equipment within the ten days. Acceptance shall also be based on running the basic hardware and software diagnostics. In addition, Lessee agrees to accept partial shipment of the Equipment with the understanding that partial shipment shall include an operable system ACCEPTED this day of June, 2004 MENARD LEASING MORROW UNIVERSITY Pamela Switzer Pamela Switzer (signature) (name/title) DECISION As of June 26, Roger had not yet signed the lease and both Professor Kahsay and Pamela Switzer, from Menard, were pressing for Roger to approve the contract (see Exhibit 2). However, Roger felt uncomfortable with the arrangement and wondered what action he should take. Roger Haskett On June 26, 2004, Roger Haskett, director of purchasing that the proposal involved a capital lease arrangement, and for Morrow University in San Antonio, Texas, was even though there was no policy to prevent capital leases evaluating a proposal negotiated by Professor Kahsay from being arranged the university did not typically enter from the engineering faculty to upgrade computer equipment in his engineering lab. Roger was concerned into such agreements Chapter 2 Supply Organization 55 Capital Leases EXHIBIT 1 Capital and Operating Leases if any of the following criteria are met, a lease must by classified as a capitale 1. Ownership of the property is transferred to the lessee at the end of the termos 2. The lease contains an option to purchase the property for less than a market 3. The lease term is greater than 75 percent of the property's estimated economice, or 4. The present value of the lease payments exceeds 90 percent of the fair market value of the property Operating Leases Any lease that is not a capital lease is an operating lease THE EQUIPMENT LEASE PROPOSAL On June 22 the purchasing department recendo MORROW UNIVERSITY With more than 1,100 faculty members and almost 30,000 undergraduate and graduate students, Morrow University from Professor Kabsay to leave eight so Curtis was recognized as a national leader in teaching as well as rescarch. Through its 12 faculties and schools and four Leasing (Menard). The payment schedule called form processors for his engineering laboratory from Me affiliated colleges, the university offered more than 60 different degree and diploma programs initial payment of S115.000 due on September 1, 2004 three annual payments of $90,000 due on March of The purchasing department's mandate was to maximize cach of the subsequent three years, and a purchase the value of funds spent on supplies, equipment, and services; ensure ethical buying practices; maintain good equipment would be $475.000, including interest Given of $90,000 due on February 28, 2008. The total cost of the supplier relations, and ensure compliance with the the nature and size of this request, Roger decided to deal regulations governing taxes, accounting procedures, and with this request personally other related university policies. The purchasing department Even though there was no policy to prevent capital was responsible for the acquisition of all goods and services leases from being arranged the university did not for the university except for construction contracts, reading enter into capital leases. In general, the purchasing material offered by the library system, items offered for department considered capital leases an expensive and resale by the campus bookstore, and purchases for the food problematic purchase arrangement that should seldom be services department undertaken. Exhibit I describes the differences between Most faculty and staff tended to handle their own capital and operating leases purchasing needs for low-value purchases, which had been In a subsequent discussion with Professora Raper made easier with online purchasing applications. For found out that Professor Kasay haaraneda capital purchases greater than $100,000, the purchasing because he did not have sufficient fun with his weal department assigned a senior buyer to monitor and assist operating budget to cover the cost of purchasing the throughout the acquisition process. Senior buyers were equipment outright Roger requested that Pole Kwa available from three functional areas: business items, change the lease to a purchase agreement with the equipment scientific items, and furniture/building items. supplier. Roer wanted to pay cash for the present value University procedures tried to maximize purchasing of the house approximately 35.000. However , Potene value and minimize vendor relations issues Prior to Kahwy was alumunt that he should handle the acquisition acquiring goods or services with a value in excess of out of his own budget and that any delays wouljoprire $7.500, two written quotes were required. Three quotes several important research projects. He was "This is the only way we can stay within my budget and have the equipment were required for acquisitions in excess of $10,000 and state policies required all acquisitions over $100,000 to be posted electronically to allow all potential vendors an just blocking academic progress" arrive on time. Several of my doctoral candidates and I hone important papers due for a worldwide conference and you are opportunity to quote. EXHIBIT 2 Conditional Sales Contract MENARD LEASING Attn: Roger Haskett We are pleased to present the following proposal as a basis for further discussion concerning the financing by Menard Leasing of your planned equipment acquisitions. We appreciate the opportunity to make this proposal to you. Menard Leasing looks forward to working with you to complete this transaction LESSEE: Morrow University EQUIPMENT: (2) Curtis SV1 Module with (4) 2.1 FJLOP Processors & Full Care Warranty until February 28, 2008 (as described in attached quotations) TERM: 42 months, commencing September 1, 2004, or 15 days after delivery of processors. ESTIMATED PAYMENT: $115,000.00 due September 1, 2004, followed by 3 annual payments of $90,000.00 commencing March 1, 2005, payable in U.S. funds, with all applicable taxes. ACTUAL PAYMENT: The Estimated Monthly Payment is based on' Menard's cost of funds on the date of this letter and, to arrive at the Actual Monthly Payment, it will be adjusted upward or downward to reflect changes in interest rates. END OF LEASE 1) Purchase for $90,000.00 February 28, 2008. CONDITIONS: 2) The absence of any material adverse changes in the Lessee's financial health or creditworthiness prior to the Funding Date. 3) The completion and due execution and delivery of Menard's standard form of Master Lease/Lease Arrangement, Delivery & Acceptance Certificate and other documents, as Menard may reasonably require, all such documents to be in form and substance satisfactory to Menard in all respects, such documents will supercede this letter once executed and delivered. 4) The acceptance of this proposal by the Lessee by June 28, 2004. 5) Lessee agrees to install and accept the Equipment set forth within ten (10) days of delivery or notify the Lessor of any problems with the Equipment within the ten days. Acceptance shall also be based on running the basic hardware and software diagnostics. In addition, Lessee agrees to accept partial shipment of the Equipment with the understanding that partial shipment shall include an operable system ACCEPTED this day of June, 2004 MENARD LEASING MORROW UNIVERSITY Pamela Switzer Pamela Switzer (signature) (name/title) DECISION As of June 26, Roger had not yet signed the lease and both Professor Kahsay and Pamela Switzer, from Menard, were pressing for Roger to approve the contract (see Exhibit 2). However, Roger felt uncomfortable with the arrangement and wondered what action he should take