Reference no: EM132802915

Problem - LEASE ANALYSIS - As an alternative, National Leasing is willing to write a 4-year lease on the computer, including maintenance, for payments of $340,000 at the beginning of each year. Fish & Chips's marginal federal-plus-state tax rate is 40%. Help Millon conduct her analysis by answering the following questions.

a. 1. Why is leasing sometimes referred to as "off-balance-sheet" financing?

2. What is the difference between a capital lease and an operating lease?

3. What effect does leasing have on

b. 1. What is Fish & Chips's present value cost of owning the computer? (Hint: Set up a table whose bottom line is a "time line" that shows the cash flows over the period t 5 0 to t 5 4. Then find the PV of these cash flows, or the PV cost of owning.)

2. Explain the rationale for the discount rate you used to find the PV.

c. 1. What is Fish & Chips's present value cost of leasing the computer? (Hint: Again, construct a timeline.)

2. What is the net advantage to leasing? Does your analysis indicate that the firm should buy or lease the computer? Explain.

d. Now assume that Millon believes that the computer's residual value could be as low as $0 or as high as $250,000, but she stands by $125,000 as her expected value. She concludes that the residual value is riskier than the other cash flows in the analysis, and she wants to incorporate this differential risk into her analysis. Describe how this can be accomplished. What effect will it have on the lease decision?

e. Millon knows that her firm has been considering moving its headquarters to a new location, and she is concerned that these plans may come to fruition prior to the expiration of the lease. If the move occurs, the company would obtain new computers; hence, Millon would like to include a cancellation clause in the lease contract. What effect would a cancellation clause have on the risk of the lease?