Page 204
A B C
1 HOW NOT TO ANALYZE A LEASE
2 Asset cost 600,000
3 Interest rate 12%
4 Lease rental payment 140,000
5 Annual depreciation 100,000
6 Tax rate 40%
7
8 NPV(leasing) 386,801 #VALUE!
9 NPV(buying) 435,544 #VALUE!
Page 1
UN-3B
A B C D E F G H
1 EQUIVALENT LOAN METHOD
2 Asset cost 600,000
3 Interest rate 12%
4 Lease rental payment 140,000
5 Annual depreciation 100,000
6 Tax rate 40%
7
8 Year 0 1 2 3 4 5 6
9
10 After-tax cash flows from leasing
11 After-tax lease rental -84,000 -84,000 -84,000 -84,000 -84,000 -84,000
12
13 After-tax cash flows from buying the asset
14 Asset cost -600,000
15 Depreciation tax shield 40,000 40,000 40,000 40,000 40,000 40,000
16 Net cash from buying -600,000 40,000 40,000 40,000 40,000 40,000 40,000
17
18 Differential cash flow: Lease saves lessor
19 Lease minus buy 516,000 -124,000 -124,000 -124,000 -124,000 -124,000 -40,000
20
21 IRR of differential cash flow 8.30% #VALUE!
22
23 Decision?? Buy #VALUE!
24
25
26 Split of loan repayment
between:
Lease minus
Loan After-tax
Principal at Repayment buy cash
27 Year payment, Interest loan
beg. year of principal flows, years
end year repayment
1-6
28 1 532,070 149,539 63,848 85,691 124,000 124,000
29 2 446,379 145,426 53,565 91,861 124,000 124,000
30 3 354,518 141,017 42,542 98,475 124,000 124,000
31 4 256,044 136,290 30,725 105,565 124,000 124,000
32 5 150,479 131,223 18,057 113,166 124,000 124,000
33 6 37,313 41,791 4,478 37,313 40,000 40,000
34
35 =NPV((1-$B$6)*$B$3,G28:$G$33) =$B$3*B28 =B28-B29 =(1-$B$6)*D28+E28
36
37 =D28+B28-B29
UN-3B
A B C D E F G H
1
THE LESSOR'S PROBLEM
Calculating the lowest acceptable lease rate
2 Asset cost 600,000
3 Interest rate 12%
4 Lowest acceptable lease payment 135,686 <-- Computed either with Goal Seek or Solver
5 Annual depreciation 100,000
6 Tax rate 40%
7
8 Year 0 1 2 3 4 5 6
9
10 Lessor after-tax cash flows from leasing
11 After-tax lease rental 81,412 81,412 81,412 81,412 81,412 81,412
12
13 Lessor after-tax cash flows from buying the asset
14 Asset cost -600,000
15 Depreciation tax shield 40,000 40,000 40,000 40,000 40,000 40,000
16 Net cash from buying -600,000 40,000 40,000 40,000 40,000 40,000 40,000
17
18 Lessor cash flows
19 Lease + buy -518,588 121,412 121,412 121,412 121,412 121,412 40,000
20
21 IRR of differential cash flow 7.40% #VALUE!
22
23
24 Split of loan repayment
between:
Lease minus
Loan After-tax
Principal at Repayment buy cash
25 Year payment, Interest loan
beg. year of principal flows, years
end year repayment
1-6
26 1 (521,513) (146,444) (62,582) (83,863) (121,412) (121,412)
27 2 (437,651) (142,419) (52,518) (89,901) (121,412) (121,412)
28 3 (347,750) (138,104) (41,730) (96,373) (121,412) (121,412)
29 4 (251,377) (133,478) (30,165) (103,312) (121,412) (121,412)
30 5 (148,064) (128,519) (17,768) (110,751) (121,412) (121,412)
31 6 (37,313) (41,791) (4,478) (37,313) (40,000) (40,000)
32
33 =NPV((1-$B$6)*$B$3,G28:$G$33) =$B$3*B28 =B28-B29 =(1-$B$6)*D28+E28
34
35 =D28+B28-B29
A B C D
1 GREENVILLE ELECTRIC CORP.
2 Turbine cost 10,000,000
3 Greenville's borrowing rate 6.00%
4 Lease payment 1,800,000
5
6 Year 0 1 2
7 Lessee after-tax lease costs
8 After-tax lease rental -1,800,000 -1,800,000 -1,800,000
9
10 Lessee after-tax purchase costs
11 Asset cost -10,000,000
12 Depreciation tax shield (Greenville Electric's tax rate = 0) 0 0
13 Net cash from buying -10,000,000 0 0
14
15 Cash saved by leasing
16 Lease - purchase cash flows 8,200,000 -1,800,000 -1,800,000
17
18 IRR of differential cash flow 3.19% #VALUE!
19 Greenville's after-tax borrowing cost 6.00% #VALUE!
20
21 UNITED TURBINE LEASING CORPORATION
22 Turbine cost 10,000,000
23 Lease payment 1,800,000
24 Depreciation (straight line, 5 years) 2,000,000
25 United Turbine's borrowing rate 6.00%
26 United Turbine's corporate tax rate 40%
27
28 Year 0 1 2
29 Lessor cash flows
30 Equipment cost -10,000,000
31 Lease payment, after tax 1,080,000 1,080,000 1,080,000
32 Depreciation tax shield 800,000 800,000
33 Total lessor cash flow -8,920,000 1,880,000 1,880,000
34
35 IRR of lessor cash flows 4.30% #VALUE!
36 United Turbine's after-tax borrowing cost 3.60% #VALUE!
E F G H
CTRIC CORP.
1
2
3
4
5
6 3 4 5 6
7
8 -1,800,000 -1,800,000 -1,800,000
9
10
11
12 0 0 0 0
13 0 0 0 0
14
15
16 -1,800,000 -1,800,000 -1,800,000 0
17
18
19
20
NG CORPORATION
21
22
23
24
25
26
27
28 3 4 5 6
29
30
31 1,080,000 1,080,000 1,080,000
32 800,000 800,000 800,000 800,000
33 1,880,000 1,880,000 1,880,000 800,000
34
35
36
UN-3B
A B C D E F G H I
1 RESIDUAL VALUES IN LEASE ANALYSIS
2 Asset cost 600,000
3 Interest rate 12%
4 Lease rental payment 140,000
5 Annual depreciation 100,000
6 Tax rate 40%
7 Residual value 100,000 <-- Anticipated to be realized in year 7; fully taxed
8
9 Year 0 1 2 3 4 5 6 7
10
11 After-tax cash flows from leasing
12 After-tax lease rental -84,000 -84,000 -84,000 -84,000 -84,000 -84,000
13
14 After-tax cash flows from buying the asset
15 Asset cost -600,000
16 Depreciation tax shield 40,000 40,000 40,000 40,000 40,000 40,000
17 After-tax residual 60,000
18 Net cash from buying -600,000 40,000 40,000 40,000 40,000 40,000 40,000 60,000
19
20 Differential cash flow
21 Lease minus buy 516,000 -124,000 -124,000 -124,000 -124,000 -124,000 -40,000 -60,000
22
23 IRR of differential cash flow 10.49% #VALUE!
24
25 Decision?? Buy #VALUE!
UN-3B
A B C D E F G H I J
RESIDUAL VALUES IN LEASE ANALYSIS
1 Estimated residual value multiplied by certainty-equivalence factor which represents
uncertainty about realizing residual
2 Asset cost 600,000
3 Interest rate 12%
4 Lease rental payment 140,000
5 Annual depreciation 100,000
6 Tax rate 40%
7 Residual value 100,000 <-- Anticipated to be realized in year 7; fully taxed
8 Certainty-equivalence factor 0.70
9
10 Year 0 1 2 3 4 5 6 7
11
12 After-tax cash flows from leasing
13 After-tax lease rental -84,000 -84,000 -84,000 -84,000 -84,000 -84,000
14
15 After-tax cash flows from buying the asset
16 Asset cost -600,000
17 Depreciation tax shield 40,000 40,000 40,000 40,000 40,000 40,000
18 After-tax residual 42,000 #VALUE!
19 Net cash from buying -600,000 40,000 40,000 40,000 40,000 40,000 40,000 42,000
20
21 Differential cash flow
22 Lease minus buy 516,000 -124,000 -124,000 -124,000 -124,000 -124,000 -40,000 -42,000
23
24 IRR of differential cash flow 9.88% #VALUE!
25
26 Decision?? Buy #VALUE!
