A company could sell a building for $650,000 or lease it out for $5,000 per month. What would need to be considered in determining if the lease option would be preferred? Why?
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A company could sell a building for $650,000 or lease it out for $5,000 per month. What would need to be considered in determining if the lease option would be preferred? Why?
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- Reynolds Construction (RC) needs a piece of equipment that costs 200. RC can either lease the equipment or borrow 200 from a local bank and buy the equipment. Reynoldss balance sheet prior to the acquisition of the equipment is as follows: a. (1) What is RCs current debt ratio? (2) What would be the companys debt ratio if it purchased the equipment? (3) What would be the debt ratio if the equipment were leased and the lease not capitalized? (4) What would be the debt ratio if the equipment were leased and the lease were capitalized? Assume that the present value of the lease payments is equal to the cost of the equipment. b. Would the companys financial risk be different under the leasing and purchasing alternatives?Suppose you work for a data processing company who needs a new supercomputer now. Your company can either buy the supercomputer for $400,000 or lease it from a computer leasing company through an operating lease. The maintenance will be provided by the leasing company. Your company will not incur any other costs except the lease payment. But the annual maintenance cost will cost the leasing company$25,000 per year for four years. The lease terms require your company to make four annual payments at the beginning of each year. The computer could be depreciated for tax purposes straight-line over four years and it will have no residual value at the end of year 4. The interest rate is 12%. Suppose the tax rate paid by your company is 21% but the leasing company pays only 15% tax due to carried over losses from their previous operation. What is the pre-tax lease payment amount that will help the leasing company break even within 4 years if it requires 8% return. What is the NPV of the…How do you treat repair and maintenance costs in lease versus purchass decision? Fewa'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 expiration of the lease. If the move occurs, Fewa would buy or lease an entirely new set of equipment, and hence management would like to include a cancellation clause in the lease contract. What impact would such a clause have on the riskiness of the lease from Fewa's standpoint? From the lessor's standpoint? If you were the lessor, would you insist on changing any of the lease terms if a cancellation clause were added?
- 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.Jane is asked to evaluate whether it would be better to lease an asset or to borrow money from the bank to buy the asset. The NPV from buying the asset is calculated to be $30,000. The NPV for the lease versus borrow to buy analysis is calculated to be $500. Which of the following statements best describe the lease versus buy decision for this investment? None of the other statements is correct. More than one of the other statements is correct. O As the asset has positive NPV, Jane indifferent between leasing the asset or borrowing to buy it. O Jane should lease the asset because her company would be better off by $30,000 compared to borrowing to buy the asset. O Jane should lease the asset as long as the NPV for the lease versus borrow to buy analysis is positive.You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease the equipment to you for $10,500 per year if you sign a guaranteed-year5-year lease (the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease. Alternatively, you could buy and maintain the equipment yourself. The cash flows from doing so are listed here: (the equipment has an economic life of 5 years). If your discount rate is 6.9%, what should you do?
- There are two parties in any lease contract—the lessee and the lessor. To a lessor, a lease analysis involves a capital budgeting analysis of the property or equipment to be leased. The lessor’s decision is either to purchase and lease-out the asset, or not make the investment at all. Like any capital budgeting decision, the lessor needs to evaluate the rate of return expected to be earned from making the lease. Further, since the cost and other terms of leases involving high-cost items are negotiated, this rate of return information is also important information for a prospective lessee. From the following statements, identify the steps involved in lease analysis from a lessor’s perspective. Check all that apply. Determine the lease payments minus income taxes and any maintenance expenses that the lessor must incur as per the lease agreement. Determine the invoice price of the leased equipment minus any lease payments made in advance. Determine the periodic…Cordell Construction needs a piece of equipment that can be leased orpurchased. The equipment costs $100. One option is to borrow $100 from the local bankand use the money to buy the equipment. The other option is to lease the equipment. Thecompany’s balance sheet prior to the equipment purchase or lease is shown below:What would be the company’s debt ratio if it chose to purchase the equipment? Whatwould be the company’s debt ratio if it leased the equipment and it could keep the leaseoff its balance sheet? Is the company’s financial risk any different whether the equipmentis leased or purchased? Explain.The terminal cap rate used for valuation purposes in a DCF is fundamentally different than the discount rate used in that same DCF. The assumed sale of the property takes place at the end of your hold period, generally 10 years later in most models. The property is older and the market and the economy have changed. With that said, what do you believe to be the right approach for terminal cap rate selection in a DCF on a development project and why?
- = You need a particular piece of equipment for your production process. An equipment-leasing company has offered to lease the equipment to you for $10,400 per year if you sign a guaranteed five-year lease (the lease is paid at the end of each year). The company would also maintain the equipment for you as part of the lease. Alternatively, you could buy and maintain the equipment yourself. The cash flows from doing so are listed below (the equipment has an economic life of five years). If your discount rate is 7.1%, what should you do? Year 0 - $40,100 Year 1 - $1,900 Year 2 - $1,900 The net present value of the leasing alternative is $ Year 3 - $1,900 (Round to the nearest dollar.) Year 4 - $1,900 Year 5 - $1,900K Fabulous Fabricators needs to decide how to allocate space in its production facility this year is considering the following contra a. What are the profitability indexes of the projects? b. What should Fabulous Fabricators de? What are the profitability indexes of the projects? The profitability index for contract Ais (Round to be decimal places) Round to two decimal places) The profitablity index for contract Dis The profitability index for contract CH b. What should Fabulous Fabrators do? (Select the best choice below) OA It should take the two projects with the highest profitability indexes C and A OB. Since it has the capacity to do both Band C and NPV NPV is greater than NPV, it should do to and C OC. Since the NPV of A is the largest, it should choose A OD. Since the profitability indes for the largest, it should choose C Data table (Click on the following icon in order to copy its contents into a spread) Contract Use of Facility 100% 55% 45% C $2.02 m $105 min $1.46 milion…Zenith Investment Company is considering the purchase of an office property. It has done an extensive market analysis and has estimated that based on current market supply or demand relationships, rents, and its estimate of operating expenses, annual NOI will be as follows: Year NOI 1 $ 1,030,000 2 1,030,000 3 1,030,000 4 1,210,000 5 1,260,000 6 1,310,000 7 1,349,000 8 1,389,170 A market that is currently oversupplied is expected to result in cash flows remaining flat for the next three years at $1,030,000. During years 4, 5, and 6, market rents are expected to be higher. It is further expected that beginning in year 7 and every year thereafter, NOI will tend to reflect a stable, balanced market and should grow at 3 percent per year indefinitely. Zenith believes that investors should earn a 12 percent return (r) on an investment of this kind.Required: a. Assuming that the investment is expected to produce NOI in years 1 to 8 and is expected to be owned for…