Question 3 i. The lessee compares the cost of owning the equipment with the cost of leasing it. Now put yourself in the

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Question 3 I The Lessee Compares The Cost Of Owning The Equipment With The Cost Of Leasing It Now Put Yourself In The 1 (63.81 KiB) Viewed 54 times

Question 3 i. The lessee compares the cost of owning the equipment with the cost of leasing it. Now put yourself in the lessor's shoes. In a few sentences, how should you analyze the decision to write or not write the lease? ii. Assume that the lease payments were actually GHS 280,000 per year, that consolidated Leasing is also in the 40 percent tax bracket, and that it also forecasts a GHS 200,000 residual value. Also, to furnish the maintenance support, Consolidated would have to purchase a maintenance contract from the manufacturer at the same GHS 20,000 annual 2 cost, again paid in advance. Consolidated Leasing can obtain an expected 10 percent pre- tax return on investments of similar risk. What would Consolidated's NPV and IRR of leasing be under these conditions? lii. What do you think the lessor's NPV would be if the lease payments were set at GHS 260,000 per year? (Hint: The lessor's cash flows would be a "mirror image" of the lessee's cash flows.) iv. Agricare'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, Agricare 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 Agricare'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? Should the cancellation clause contain any restrictive covenants and/or penalties of the type contained in bond indentures or provisions similar to call premiums?