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Corporate Finance: Lease vs Buy

The document discusses leasing versus buying assets for three companies and provides examples to calculate the net advantage of leasing. It also defines the differences between purchasing an asset, leasing an asset, operating leases and financial leases. Finally, it provides a case study on Wildcat Oil Company deciding whether to lease or buy a new drilling system and calculates the net advantage of leasing.

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400 views1 page

Corporate Finance: Lease vs Buy

The document discusses leasing versus buying assets for three companies and provides examples to calculate the net advantage of leasing. It also defines the differences between purchasing an asset, leasing an asset, operating leases and financial leases. Finally, it provides a case study on Wildcat Oil Company deciding whether to lease or buy a new drilling system and calculates the net advantage of leasing.

Uploaded by

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

AQ064-3-3-CFIN-Corporate Finance

Tutorial: Leasing

1. Your company wants to purchase a new network file server for its wide-area computer
network. The server costs $75,000. It will be completely obsolete in three years. Your
options are to borrow the money at 10% or to lease the machine. If you lease, the
payments will be $27,000 per year, payable at the end of each of the next three years. If
you buy the server, you can depreciate it straight-line to zero over three years. The tax
rate is 34 percent. Should you lease or buy?

2. Bob's Pizza is considering either leasing or buying a new oven. The lease payments
would be $10,400 a year for 3 years. The purchase price is $29,000. The equipment has a
3-year life and then is expected to have a resale value of $3,500. Bob's Pizza uses
straight-line depreciation, borrows money at 10 percent, and has a 32 percent tax rate.
What is the net advantage to leasing?

3. Charleston Marina is considering either leasing or buying some new equipment it needs
for repairing boats. The lease payments would be $7,200 a year for 3 years. The purchase
price is $20,800. The equipment has a 3-year life and then is expected to have a resale
value of $4,700. The firm uses straight-line depreciation, borrows money at 8.5 percent,
and has a 34 percent tax rate. What is the net advantage to leasing?

4. Explain the differences between purchasing an asset and leasing an asset.

5. Explain the differences between an operating lease and a financial lease.

6. The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-
assisted drilling system for its oil exploration business. Management has decided that it
must use the system to stay competitive; it will provide $1.75 million in annual pretax
cost savings. The system costs $8 million and will be depreciated straight-line to zero
over 5 years. Wildcat’s tax rate is 34 percent, and the firm can borrow at 9 percent.
Lambert Leasing Company has offered to lease the drilling equipment to Wildcat for
payments of $1.9 million per year. Lambert’s policy is to require its lessees to make
payments at the start of the year. What is the NAL for Wildcat?

7. How does the fact that the lessor and lessee have different borrowings rates affect the
calculation of the NAL?

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