Lease VS Buy

Jun 21st, 2015
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Start with the partial model in the file Ch18 P06 Build a Model.xls on the textbook’s Web site. As part of its overall plant modernization and cost reduction program, Western Fabrics’s management has decided to install a new automated weaving loom. In the capital budgeting analysis of this equipment, the IRR of the project was found to be 20% versus the project’s required return of 12%. The loom has an invoice price of $250,000, including delivery and installation charges. The funds needed could be borrowed from the bank through a 4-year amortized

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IRRRequired returnLoom cost20%12%$250,000Loan interest ratePost tax discount rateAnnual MaintenanceTax rateLease rateExpected lifeExpected salvage valueMarket value after 4 yearsBook value after 4 yearsAnnual loan paymentYearBeginning loan balanceInterest paymentPrincipal paymentEnding loan balanceNext, we calculate thedepreciation schedule as perMARCS5YearDepr. RateDepr. Exp.0.1000 4 years0.06000.060020,00040%70,0008 years042,50042,500Rs. -78,867.701250,0002500053867.7196,1322$196,132$19,61359254.47136,87834$136,878 $71,698$13,688$7,17065179.917 71697.9171,6980120%232%319%412%511%$50,000$80,000$47,500$30,000$27,50001234NPV Lease Analysis of CashFlowsYear =PURCHASE DECISIONPurchase costLoan proceedsAfter-tax interest paymentPrincipal paymentMaintenance costTax savings from maintenancecostTax savings from depreciation-250,000250,000-15000-53867.7-20,000800020000-11767.938 -8212.67 -4301.87-59254.47 -65179.9 -71697.9($20,000) ($20,000) ($20,000)$8,00032000$8,00019000$8,00012000Net cash flow before salvagevalue considerationSalvage value-60867.7Net cash flow from ownershipDiscount ratePV cost of ownershipCost of leasingLease paymentTax savings from leasepaymentNet cash flow from leasingPV cost of leasing-51022.408-66392.6-75999.8$42,500-60867.7-51022.4081.000.940.89-57422.35849 -45409.76148-66392.60.84-55744.5-33499

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