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Homework 3 Leasing

The document compares the financial implications of leasing versus buying assets for two firms, Augustana Firm and BSAD Leasing Corp. Augustana Firm's analysis shows a net present value (NPV) of -15,843, leading to the decision to buy, while BSAD Leasing Corp. has an NPV of -104,141.70, resulting in the decision not to buy. The analysis includes lease payments, tax benefits, depreciation, and cash flow for both scenarios.

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cjsimmonds21
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10 views4 pages

Homework 3 Leasing

The document compares the financial implications of leasing versus buying assets for two firms, Augustana Firm and BSAD Leasing Corp. Augustana Firm's analysis shows a net present value (NPV) of -15,843, leading to the decision to buy, while BSAD Leasing Corp. has an NPV of -104,141.70, resulting in the decision not to buy. The analysis includes lease payments, tax benefits, depreciation, and cash flow for both scenarios.

Uploaded by

cjsimmonds21
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Augustana Firm

Asset Cost 600,000


Interest Rate 12% 7%
Lease Payment 150,000
Annual Depreciation 100,000
Tax Rate 40%

Year 0 1 2 3

Lease
Lease Payments -150,000 -150,000 -150,000
Tax Benefits of Lease Payments 60000 60000 60000
Cash Flow from Leasing -90,000 -90,000 -90,000

Buy
Asset Cost -600,000
Depreciation Tax Shield 40,000 40,000 40,000
Cash Flow From Buying -600,000 40,000 40,000 40,000

Differencial Cash Flow: Lease Saves Lessee


Lease Minus Buy 600,000 -130,000 -130,000 -130,000
NVP of Differential Cash Flow (Net Advantage to Leasin -15,843
Decision BUY
4 5 6

-150,000 -150,000 -150,000


60000 60000 60000
-90,000 -90,000 -90,000

40,000 40,000 40,000


40,000 40,000 40,000

-130,000 -130,000 -130,000


BSAD Leasing Corp.
Asset Cost 900,000
Interest Rate 12%
Lease Payment 180,000
Annual Depreciation 150,000 7.200%
Tax Rate 40%

Year 0 1 2 3
Asset Cost -900,000
Lease Payment 180,000 180,000 180,000
Depreciation 150,000 150,000 150,000
Income before Tax 30,000 30,000 30,000
Tax 12,000 12,000 12,000
Net Income 18,000 18,000 18,000
Total Cash Flow -900,000 168,000 168,000 168,000

NPV ($104,141.70)
Decision Don’t Buy
4 5 6

180,000 180,000 180,000


150,000 150,000 150,000
30,000 30,000 30,000
12,000 12,000 12,000
18,000 18,000 18,000
168,000 168,000 168,000

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