Scribd
Upload
285 views6 pages

Chapter 6 Leasing

The document discusses lease evaluation methods from the perspectives of both the lessor and lessee. It provides an example of calculating the highest acceptable lease rental for the lessor using an asset cost of $600,000, interest rate of 12%, annual depreciation of $100,000, and tax rate of 40%. It also examines lease cash flows for both the lessee Greenville Electric and the lessor United Turbine Leasing Corporation over a 6 year period for a $10 million turbine.

Uploaded by

Muntazir Hussain
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
285 views6 pages

Chapter 6 Leasing

The document discusses lease evaluation methods from the perspectives of both the lessor and lessee. It provides an example of calculating the highest acceptable lease rental for the lessor using an asset cost of $600,000, interest rate of 12%, annual depreciation of $100,000, and tax rate of 40%. It also examines lease cash flows for both the lessee Greenville Electric and the lessor United Turbine Leasing Corporation over a 6 year period for a $10 million turbine.

Uploaded by

Muntazir Hussain
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
You are on page 1/ 6

Equivalent load method of lease evaluation

DECISSION TO BUY OR LEASE

Asset cost

600,000

LESSE PROBLEM

Interest rate
Lease rental payment
Annual depreciation
Tax rate

12%
140,000
100,000
40%

Year
After-tax cash flows from leasing
After-tax lease rental

0
-84000

After-tax cash flows from buying the asset


Asset cost
Depreciation tax shield
Net cash from buying
Differential cash flow: Lease saves lessor
lease minus buy
IRR of differential cashflows
Decission

The Lessors Problem:


Calculating the Highest Acceptable Lease Rental
What is acceptable lease rental for lessor
Lessor PROBLEM

-600000
-600000
516000
8.30%
buy

Asset cost
Interest rate
Lease rental payment
Annual depreciation
Tax rate

Year
After-tax cash flows from leasing
After-tax lease rental

After-tax cash flows from buying the asset


Asset cost
Depreciation tax shield
Net cash from buying
Differential cash flow: Lease saves lessor
lease plus buy
IRR of differential cashflows

Minicase: When Is Leasing Pro table

600,000
12%
135,991
100,000
40%
0
81595

-600000
-600000
-518405
7.46%

for Both the Lessor and Lessee?

Turbine cost
Greenville's borrowing rate
Lease payment

10,000,000
6.00%
1,800,000

Year
Lessee after-tax lease costs
After-tax lease rental

-1,800,000

-1800000

Lessee after-tax purchase costs


Asset cost
Depreciation tax shield (Greenville Electric's tax rate = 0)
Net cash from buying
lease-purchase cashflows
IRR

-10,000,000
-10,000,000
8200000
3%

0
0
-1800000

UNITED TURBINE LEASING CORPO


Turbine cost
Lease payment
Depreciation (straight line, 5 years)
United Turbine's borrowing rate
United Turbine's corporate tax rate
Year
Lease rental

If lessor want to buy


Asset cost
After tax shield
Total
lease+buy cashflow
IRR

Exercise
Q1 Part A
Asset cost
Depreciation 1-5 years
Rental payments
Tax rate
Cost of capital
Year

10,000,000
1,800,000
2,000,000
6.00%
40%
0
1080000

1
1080000

-10,000,000
800000
-10,000,000
800,000
-8,920,000 1,880,000
4.30%

1000000
200000
300000
40%
10%
0

Leasing
After tax leas rental

BUY
Cost
Tax shield
Total
Lease - Buy
IRR
Decision

-180000

-1000000
-1000000
820000
19.17%

80000
80000
-260000

BUY

Q1 Part B
Asset cost
Depreciation 1-5 years
Rental payments
Tax rate
Cost of capital

1000000
200000
299977.8689
40%
10%

Year
Leasing
After tax leas rental

BUY
Cost
Tax shield
Total
Lease +Buy
IRR
Decision

-180000

179986.7213 179986.72

-1000000
80000
-1000000
80000
-820013.2787 259986.72
19.16%
BUY

Muntazir Hussain

-84000

-84000

-84000

-84000

-84000

40000
40000

40000
40000

40000
40000

40000
40000

40000
40000

40000
40000

-124000

-124000

-124000

-124000

-124000

-40000

81595

81595

81595

81595

81595

40000
40000

40000
40000

40000
40000

40000
40000

40000
40000

40000
40000

121595

121595

121595

121595

121595

40000

or

GREENVILLE ELECTRIC CORPORATION

-1800000 -1800000 -1800000 -1800000

0
0
0
0
0
0
0
0
-1800000 -1800000 -1800000 -1800000

0
0
0

UNITED TURBINE LEASING CORPORATION

2
1080000

5
1080000

6
0

800000
800000
800000
800000
800,000 800,000 800,000 800,000
1,880,000 1,880,000 1,880,000 1,880,000

800000
800,000
800,000

3
1080000

4
1080000

-180000

-180000

-180000

-180000

80000
80000
-260000

80000
80000
-260000

80000
80000
-260000

80000
80000
-260000

80000
80000
-80000

179986.7 179986.7 179986.7 179986.7

80000
80000
80000
80000
80000
80000
80000
80000
259986.7 259986.7 259986.7 259986.7

80000
80000
80000

You might also like