Now assume that Millon believes the computer’s residual value could be as low as $0 or as high as $250,000, but she stands by $125,000 as her expected value. She concludes that the residual value is riskier than the other cash flows in the analysis, and she wants to incorporate this differential risk into her analysis. Describe how this can be accomplished. What effect will it have on the lease decision?

Now assume that Millon believes the computer’s residual value could be as low as $0 or as high as $250,000, but she stands by $125,000 as her expected value. She concludes that the residual value is riskier than the other cash flows in the analysis, and she wants to incorporate this differential risk into her analysis. Describe how this can be accomplished. What effect will it have on the lease decision?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter19: Lease Financing

Section: Chapter Questions

Problem 5MC: Now assume that the equipments residual value could be as low as 0 or as high as 400,000, but...

See similar textbooks

Similar questions

Now assume that the equipments residual value could be as low as 0 or as high as 400,000, but 200,000 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 Lewis lease-versus-purchase decision?
Now assume that the equipment’s residual valuecould be as low as $0 or as high as $400,000,but $200,000 is the expected value. Because theresidual value is riskier than the other relevantcash flows, this differential risk should be incorporated into the analysis. Describe how this couldbe accomplished. (No calculations are necessary,but explain how you would modify the analysisif calculations were required.) What effect wouldthe residual value’s increased uncertainty have onLewis’s lease-versus-purchase decision?
Lewis’s management has been considering moving to a new downtown location, and they are concerned that these plans may come to fruition prior to the equipment lease’s expiration. If the move occurs then Lewis would buy or lease an entirely new set of equipment, so management would like to include a cancelation clause in the lease contract. What effect would such a clause have on the riskiness of the lease from Lewis’s standpoint? From the lessor’s standpoint? If you were the lessor, would you insist on changing any of the other lease terms if a cancelation clause were added? Should the cancelation clause contain provisions similar to call premiums or any restrictive covenants and/or penalties of the type contained in bond indentures? Explain your answer.
Nast Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher MIRR rather than the one with the higher NPV, how much value will be forgone? Note that under some conditions choosing projects on the basis of the MIRR will cause $0.00 value to be lost.
Ms Afiqah is a financial advisor. Ms Ratna approached herfor financial advisory services while she wanted to make along-term investment. She wanted to invest in low-riskassets, and she is happy with a minimum return. Ms Afiqahpromised Ms Ratna that Ms Ratna would get a fixed returnof 3% per annum if she invests in a fixed-return assetthrough Ms Afiqah as an agent. Ms Ratna agreed to theinvestment deal and started to pay RM500 per month to MsAfiqah for investing in a fixed-return asset. However,instead of investing the funds directly to any fixed assetinstrument, Ms Afiqah transferred the money to her share- trading account. Ms Afiqah purchased share using thatmoney under her name and made a gain of more than 10%per annum while returning only 3% to Ms Ratna every year. a) Critically evaluate Ms Afiqah’s action based on theconcept of fiduciary duty. (minimum 200 words) b) Analyse in what ways Islamic code of conducts can solvethe issues in the above scenario. (minimum 300 words)
Sexton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used. WACC: 12.75% 0 1 2 3 4 CFs -$2050 $750 $760 $770 $780 CF L -$4300 $1500 $1518 $1536 $1554 Options: $24.80 $30.25 $22.32 $28.52 $22.57
Sexton Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the higher IRR, how much value will be forgone? Note that under certain conditions choosing projects on the basis of the IRR will not cause any value to be lost because the one with the higher IRR will also have the higher NPV, so no value will be lost if the IRR method is used. WACC: 9.50% 0 1 2 3 4 CFS -$2,050 $750 $760 $770 $780 CFL -$4,300 $1,500 $1,518 $1,536 $1,554 a. $145.46 b. $226.70 c. $228.58 d. $188.91 e. $230.47
ND Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. The CEO believes the IRR is the best selection criterion, while the CFO advocates other methods. If the decision is made by choosing the project with the higher IRR, how much, if any, value will be forgone, i.e., what's the NPV and IRR of the chosen project(s). What is the Payback period and discounted payback period?
Yonan Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost. WACC: 14.25% 0 1 2 3 4 CFS -$950 $500 $800 $0 $0 CFL -$2,100 $400 $800 $800 $1,000 G $93.62 $95.90 $127.87 $0.00 $116.46
Carolina Company is considering Projects S and L, whose cash flows the table below shows. These projects are mutually exclusive, equally risky, and are not repeatable. If the decision is made by choosing the higher IRR project, how much value will be forgone? Note that selecting projects based on the IRR will cause $0.00 value to be lost under some conditions. Identify also the range of discount rates in which project L will be selected. WACC: 7.75% Year 0 1 2 3 4 CFS −$1,050 $675 $650 CFL −$1,050 $360 $360 $360 $360 Please show work in Excel. I'm having trouble finding the discount rates.
Yonan Inc. is considering Projects S and L, whose cash flows are shown below. These projects are mutually exclusive, equally risky, and not repeatable. If the decision is made by choosing the project with the shorter payback, some value may be forgone. How much value will be lost in this instance? Note that under some conditions choosing projects on the basis of the shorter payback will not cause value to be lost. WACC: 10.25% 0 1 2 3 4 CFS -$800 $650 $350 $0 $0 CFL -$1,900 $550 $600 $600 $840 Please explain and show calculations.
You probably noticed that lease analysis seems a bit like capital budgeting analysis, because the cash flows are estimated over the life of the project or lease. The present value of the cash flows dictates the manager’s decision. Are cash flows that are estimated in lease analysis more or less risky than capital budgeting cash flows? Less risky More risky